SNB Pledges to Defend Franc Cap as Crisis Intensifies: Economy

SNB Keeps Franc Cap on Hold as Worsening Crisis Adds Pressure
With Europe’s debt crisis enduring and investors growing more concerned about a euro breakup, pressure on the SNB to defend the franc ceiling is increasing. Photographer: Gianluca Colla/Bloomberg

The Swiss central bank pledged to keep defending its franc cap and left borrowing costs at zero to protect the economy from “exceptionally high” risks as the euro area’s crisis intensifies.

The Swiss National Bank, led by President Thomas Jordan, today maintained the ceiling at 1.20 francs per euro and reiterated that it will uphold the measure “with the utmost determination.” The Zurich-based central bank also kept its benchmark interest rate on hold, as projected by all 20 economists in a Bloomberg News survey.

With Europe’s debt turmoil worsening and investors growing more concerned about a euro breakup, pressure on the SNB to defend the franc ceiling is increasing. The central bank’s foreign-currency reserves surged to a record in May as policy makers stepped up euro purchases to stave off attacks spurred by the crisis. Jordan said at a briefing in Bern that there “is no limit” to interventions and officials are considering emergency measures if the turmoil escalates.

“European developments have shown that the SNB hasn’t chosen an easy instrument with the ceiling,” said Felix Brill, an economist at Wellershoff & Partners Ltd. in Zurich. “It’s a question of credibility. The SNB has signaled to investors that it won’t give in and that it’s ready to do more if needed.”

The Swiss currency, which is considered a haven in times of global turmoil, was little changed today at 1.2009 per euro as of 11:48 a.m. in Zurich.

‘Upward Pressure’

The euro region’s fiscal woes “have deteriorated seriously” over the past months, sparking “increased upward pressure” on the franc, Jordan said. He called the franc “still high” versus the euro at the current level.

“Switzerland will experience a significant economic slowdown over the rest of the year,” he said. “The risks for the Swiss economic situation remain exceptionally high.”

Policy makers raised their 2012 growth forecast to 1.5 percent from about 1 percent after what they called an “unexpectedly strong” winter half-year.

The SNB kept its inflation forecasts largely unchanged. Consumer prices will fall 0.5 percent this year, before rising 0.3 percent in 2013 and 0.6 percent in 2014, the SNB said. In March, it forecast prices to drop 0.6 percent this year.

‘Unorthodox Tools’

The central bank, which doesn’t disclose details of its market operations, introduced the ceiling in September after the franc’s surge to near parity with the euro raised deflation threats and eroded export competitiveness. Foreign-currency holdings rose to 303.8 billion francs ($316 billion) in May from 237.6 billion francs in April as the turmoil worsened.

Jordan, 49, said the SNB “will not tolerate” any further increase in the franc and “stands ready to take further measures at any time.”

“We’re obviously considering other measures” that could be used if there’s an “escalation of the crisis,” he said.

Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva, said in an e-mailed note today the introduction of “unorthodox policy tools” such as capital controls are “highly unlikely” as long as the economic recovery remains steady.

Swiss Recovery

The franc ceiling has helped soften the impact of the euro region’s economic slump. The government on June 12 raised its economic forecast for this year on stronger domestic demand. The KOF leading economic indicator rose for a fourth month in May and consumers were the most optimistic in a year in April.

Burckhardt Compression Holding AG, which sells compressors to Exxon Mobil Corp., said on June 5 that new order growth may exceed 10 percent this year. Cie. Financiere Richemont SA, the world’s second-biggest luxury goods company, last month reported full-year profit that beat analysts’ estimates.

Credit Suisse Group AG and Deutsche Bank AG today lowered their forecasts for China’s growth this year. South Korea’s central bank Governor Kim Choong Soo reiterated his concerns about the risks posed by excessive global liquidity and policy makers in New Zealand and the Philippines kept their benchmark interest rates unchanged.

The European Central Bank last week also kept borrowing costs on hold ahead of Greek elections. Greece will vote on June 17 on whether to back Alexis Tsipras, who wants to scrap the austerity plan dictated by the European Union and the International Monetary Fund as a condition of its bailout.

SNB Diversification

Latest available data show the SNB has been reducing its euro exposure over the past two years. Euro holdings accounted for 51 percent of reserves at the end of the first quarter, down from 70 percent in the second quarter of 2010. Reserves of dollars rose to 28 percent from 22 percent in that period.

Jordan said the SNB added currencies such as Australian and Singapore dollars as well as Danish krone and Swedish krona in 2010 “to diversify its investments further.”

“Since the first quarter of 2012, the SNB has also been investing in the Korean won,” he said. “Additional investment opportunities in the advanced and emerging economies are continually being evaluated, both for bonds and for shares, although this is subject to an adequate level of liquidity in the markets in question.”

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