SNB Wins Respite as Franc Ceiling Outlives Hildebrand Era

Swiss National Bank Interim Chairman Thomas Jordan
Swiss National Bank Interim Chairman Thomas Jordan. Photographer: Gianluca Colla/Bloomberg

Swiss central bank interim chairman Thomas Jordan will tomorrow bid to prolong the success of his predecessor’s currency policy as the economy shows signs of regaining strength.

Jordan, in his first decision as chief, will maintain the ceiling of 1.20 francs per euro, according to all 14 economists in a Bloomberg News survey. That level hasn’t been breached in the six months since its creation. The Swiss National Bank, which will announce its decision at 9:30 a.m. in Zurich, will also keep borrowing costs at zero, a separate survey shows.

Jordan, 49, found himself at the forefront of defending the franc cap against investors seeking a haven from the euro-region’s turmoil after Philipp Hildebrand quit in January. As the Swiss economy shows signs of stabilization and surging energy costs drive up prices across Europe, the SNB may have room to keep the ceiling on hold for some months, economists at banks including UBS AG and UniCredit Group said.

“With the economy seemingly avoiding a recession and fears of deflation receding, there’s no need for the SNB to act on its cap and the benchmark rate anytime soon,” said Caesar Lack, an economist at UBS AG’s Wealth Management Research in Zurich. “However, they might give first hints of longer-term inflation risks which could justify a tightening further down the road”

Franc Surge

The SNB, which won’t hold a briefing, will also publish its latest economic projections. At the December quarterly meeting, it forecast consumer prices to fall 0.3 percent this year before climbing 0.4 percent in 2013. The economy will expand 0.5 percent this year, it said.

The franc traded at 1.2107 versus the euro at 11:07 a.m. in Zurich, little changed on the day. Versus the dollar, it was at 92.67 centimes.

The franc gained as much as 37 percent against the euro in the 12 months before the cap was introduced on Sept. 6, hurting exporters including watchmaker Swatch Group AG, as the region’s worsening fiscal crisis prompted investors to pile into the currency. It has since traded between 1.20 and 1.25 per euro, with Jordan and board member Jean-Pierre Danthine pledging to defend the measure “with the utmost determination” if needed.

“There will be a time when we return to a normal situation,” Jordan said at an event in Zurich on Feb. 28. “Financial markets will calm down and there will be less need for a safe haven. At the moment, the franc is overvalued.”

‘Negative Scenarios’

“Franc buyers are still paying a premium for hedging against the risk of negative scenarios,” said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. “Evidently, the nascent economic recovery and subsiding euro-debt crisis have not yet eased investors’ risk aversion sufficiently.”

Euro-area finance ministers on March 13 signed off on a second Greek bailout, clearing the way for the first payment from the 130 billion-euro ($171 billion) package to be made this month. The agreement caps months of grueling negotiations that sparked concerns that the nation may be forced to default.

The SNB spent 17.8 billion francs ($19.4 billion) in 2011 to stem what it called the currency’s “massive overvaluation.” That compares with 144 billion francs it used in the previous year to buy currencies, a policy that sparked a record loss. The Swiss government is set to confirm whether it will appoint Jordan as the new chairman next month.

“Markets believe that the limit will hold,” said Claude Maurer, an economist at Credit Suisse Group AG in Zurich. “The SNB’s assertions proven so credible that they didn’t need much money to defend the cap.”

Hildebrand ‘Too Strong’

Swiss President Eveline Widmer-Schlumpf today defended Hildebrand, saying he did an “excellent job” and reiterated that it’s important to have an independent central bank.

“Hildebrand was probably a little bit too strong for some political forces and he couldn’t be influenced enough,” she told the lower house of parliament in Bern during a debate. “The SNB was and is able to act. Fortunately for our country, we have a strong institution.”

The Swiss economy is showing some signs of regaining strength. The KOF leading indicator improved in February, manufacturing contracted at a weaker pace and the BAK Basel Institute said on March 6 it expects gross domestic product to rise 0.7 percent this year instead of a previously estimated 0.4 percent, with the economy averting a recession.

Swiss investor confidence rose for a third month in March, the ZEW Center for European Economic Research said today.

Deflation Risk

Still, exports may increase just 0.6 percent this year before expanding 3.6 percent in 2013, a survey by the Zurich-based KOF economic research institute showed last week. Swiss dental-implant maker Nobel Biocare Holding AG said last month it’s cautious about 2012 after fourth-quarter profit missed analysts’ estimates on lower sales from Europe and Japan.

Even after the introduction of the cap, the euro’s value versus the Swiss currency is still 7 percent below last year’s levels, highlighting the risk of deflation as costs for imported goods drop. The price of foreign goods fell 3.4 percent in February from a year ago.

With the ceiling stabilizing the exchange rate and surging energy costs likely to feed into consumer prices over the coming months, this development will reverse, said Alexander Koch, an economist at UniCredit in Munich.

“The deflationary effect of imported goods will fade over the next months,” he said “For next year, I even expect the SNB to raise its overall inflation forecast.”

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