SNB Keeps Rates on Hold as Hildebrand Signals Franc Concern

SNB Leaves Key Rate on Hold as Hildebrand Signals Concern
The Zurich-based Swiss National Bank left its three-month Libor target rate at 0.25 percent. Photographer: Adrian Moser/Bloomberg

The Swiss central bank today left its benchmark interest rate near zero as President Philipp Hildebrand said that policy makers are “concerned” about the franc’s surge.

The Zurich-based Swiss National Bank left its three-month Libor target rate at 0.25 percent. That’s in line with the forecasts of all 26 economists in a Bloomberg News survey. The franc surged to a record 1.1995 versus the euro today, breaching 1.20 for the first time.

SNB policy makers have been weighing the threat of the currency’s ascent hurting exporters such as watchmaker Swatch Group AG against the risks of near-zero rates fueling price pressures. While central banks from Frankfurt to Stockholm have started tightening monetary reins, Hildebrand said at a briefing in Bern today that “downside risks predominate” with the franc’s ascent among the main threats to exports and growth.

“The franc seems to be the main reason behind today’s decision,” said David Kohl, deputy chief economist at Julius Baer Group in Frankfurt. “It isn’t hard to imagine that it will show an impact on the economy at some point. We still expect the SNB to raise rates in September but there’s a risk that they’ll wait until the December assessment.”

The SNB left its growth forecast for this year at about 2 percent and forecast inflation to average 0.9 percent in 2011, 1 percent in 2012 and 1.7 percent in 2013. It had previously forecast inflation at 0.8 percent this year and 1.1 percent next before accelerating to 2 percent in 2013.

Intervention Loss

Hildebrand didn’t make any remarks on whether the SNB is considering intervening in currency markets again. The central bank has kept borrowing costs on hold for more than two years and in June 2010 abandoned attempts to weaken the franc by purchasing foreign currencies. Its intervention policy contributed to a $21 billion loss in 2010.

The Swiss currency was little changed after the announcement, trading at 1.1997 at 11:28 a.m. in Zurich. Increasing investor concern that Greece may be forced to restructure its debt has pushed up the franc 16 percent against the euro over the past year. Standard & Poor’s this week lowered its Greek rating and said there’s a “significantly higher likelihood of one or more defaults” in the euro region.

The Swiss currency, perceived as a haven during times of turmoil, reached an all-time high of 83.27 centimes against the dollar on June 7. It appreciated 33 percent against the dollar over the past year.

Growth Threat

The Swiss government in Bern on June 14 lowered its 2012 growth forecast, saying that any further franc gains would threaten economic expansion “to a serious degree.” A significant downward correction of the franc is not expected in the short run,” it said on that day.

Cie. Financiere Richemont SA, the Swiss maker of Baume & Mercier watches, on May 19 missed full-year profit estimates partly because of the franc. Swatch Chief Executive Officer Nick Hayek has called the currency’s ascent “catastrophic.”

“Despite the strong appreciation of the Swiss franc, the economy continues to benefit from robust international demand,” the central bank said today. “However, margins in the export industry are coming under increasing pressure.”

“For the SNB, the stronger franc could be the price to pay to kill higher inflation expectations right away,” said Julien Manceaux, an economist at ING Group in Brussels in an e-mailed note. “At this current juncture, we still believe that a first rate hike in September remains the most likely outcome.”

Price Pressures

The franc’s ascent has helped shield the economy from imported price pressures. Swiss consumer prices rose 0.3 percent in May from a year ago, calculated using a harmonized European Union method. In the euro region, inflation was at 2.7 percent last month, prompting the European Central Bank to signal it’s ready to raise its benchmark interest rate in July.

Hildebrand said that the latest inflation forecasts indicate no “urgent need” to raise borrowing costs.

“Over the course of 2012, the path of the new forecast is lower than that of March because of the latest appreciation of the franc,” he said. “Towards the end of the forecast period, inflation rises briskly. This shows that the current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising price stability.”

Hildebrand said that the forecasts are based on the premise that the currency may stabilize in the medium term.

“Should the exchange rate again be subject to significant changes, a reassessment of the inflation outlook would be required,” he said.

Rate Expectations

Interest-rate futures show that markets have postponed expectations for the first increase to March 2012 from December 2011. Swiss borrowing costs are the lowest among major global economies after the U.S. and Japan.

So far, the Swiss economy is showing few signs of slowdown. Manufacturing growth accelerated in May, leading economic indicators held at the highest in almost five years and unemployment dropped to 3 percent, when adjusted for seasonal swings. That’s the lowest in more than two years.

“The SNB statement shows a more dovish assessment of the economic outlook,” said Alexander Koch, an economist at UniCredit Group in Munich. “Apparently the SNB chooses very cautious rhetoric despite the still solid Swiss economic situation. That’s the best instrument at the moment to prevent further franc strength.”


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