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SNB May Leave Benchmark Near Zero to Keep Lid on Franc

The Swiss central bank may keep borrowing costs near zero tomorrow in a bid to keep a lid on the franc after Europe’s debt crisis pushed the currency to a record, threatening the country’s recovery.

The Swiss National Bank, led by Philipp Hildebrand, will leave the three-month Libor target rate at 0.25 percent, according to all 19 economists in a Bloomberg News survey. The Zurich-based central bank will announce its decision at 9:30 a.m. tomorrow followed by a press conference 30 minutes later.

The Swiss franc has appreciated 16 percent against the euro this year as investors became more concerned about the ability of European governments to contain the fiscal crisis and prevent a breakup of the 16-member region. While the SNB in June stopped intervening in currency markets, a stronger franc may undermine the country’s export-led recovery and increase deflation risks.

“The Swiss central bank is definitely mindful of the euro-area crisis,” said David Kohl, deputy chief economist at Julius Baer Group in Frankfurt, who expects the SNB to keep borrowing costs on hold until June 2011. “They will refrain from anything which could push up the franc. It will be a quiet meeting.”

The Swiss currency climbed to a record 1.2759 against the euro today and traded at 1.2778 at 10:25 a.m. in Zurich.

‘Resilient’ Exports

The Swiss government yesterday forecast economic growth to weaken to 1.5 percent next year from an estimated 2.7 percent in 2010, citing Europe’s debt crisis and a strengthening franc among the risks. The SNB, which in September projected the economy to grow about 2.5 percent this year, tomorrow will also release its 2011 economic estimate.

While the SNB in June phased out its 15-month policy of countering franc gains through purchases of foreign currencies, Hildebrand said on Nov. 23 that the central bank is ready “to take exceptionally far-reaching measures” if needed.

With governments from Ireland to Spain struggling to reduce their budget deficits, the euro has plunged 5.2 percent against the franc this year. That’s making Swiss exports from Swatch Group AG watches to ABB Ltd. turbochargers less competitive in the region buying two thirds of all goods.

“Swiss exports have so far been surprisingly resilient to the strength of the currency,” said Eoin O’Callaghan, an economist at BNP Paribas SA in London. Still, “it’s too early to sound the all-clear. The sector remains vulnerable to additional appreciation.”

‘Dominant Issue’

Switzerland’s recovery is already cooling. Growth weakened in the third quarter, leading economic indicators fell to the lowest level in seven months in November, and investor confidence declined. Consumer prices rose 0.2 percent in November from a year earlier partly as a stronger franc lowered costs of imports such as heating oil.

The SNB in September forecast inflation to average 0.7 percent this year and 0.3 percent in 2011 before accelerating to 1.2 percent in 2012. The central bank, which aims to keep annual gains in consumer prices below 2 percent, has said that inflation may “temporarily” turn negative in early 2011.

Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt, says that while he considers the SNB’s inflation forecasts too low, he doesn’t expect the central bank to raise projections as policy makers keep the benchmark rate on hold.

“The euro-region crisis remains the dominant issue at the moment,” Schumacher said. “The SNB is well aware that the consequences for the Swiss economy, through the exchange rate, could be quite dramatic if the situation got a lot worse.”

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