The Swiss central bank’s policy of enforcing its currency ceiling is appropriate to prevent deflation, the bank’s president said.
“We are enforcing the minimum exchange rate with all determination because it is the right monetary policy,” Swiss National Bank President Thomas Jordan told SonntagsBlick newspaper in the pre-release of an interview to be published tomorrow. The Swiss National Bank has to do that “to prevent a deflationary development.”
SNB spokesman Walter Meier confirmed the remarks.
The central bank’s foreign-currency reserves jumped about 20 percent in the five months through May as policy makers stepped up their defense of the ceiling of 1.20 francs per euro introduced in September to fight deflation and help exporters. Investors are piling into the Swiss currency, seen as a safe haven in times of turmoil, as euro area leaders are struggling to contain the region’s debt crisis.
Expanding the SNB balance sheet “is just a result of our monetary policy,” Jordan added. “We have to accept the risks associated with that. The National Bank is able to bear them.”
Foreign currency reserves increased to 306.1 billion francs ($322.4 billion) in May from 247.2 billion francs in the previous month, the central bank said on June 29 when publishing its latest balance sheet data.
Through its purchases of euros, the central bank increases the amount of francs available to Switzerland’s lenders, raising the risk of inflation in the medium and long term.
Still, “over the next years inflation is not a problem,” Jordan said. “On the contrary. We have to enforce the minimum exchange rate” to fight the risk of deflation.
The franc appreciated more than 17 percent against the euro, the currency of Switzerland’s main trading partners, in the 12 months before the introduction of the limit, threatening exports and boosting the risk of deflation. Year-on-year consumer prices have fallen in the past eight consecutive months as the franc’s strength made imported products more affordable.
The Swiss currency traded at 1.20120 against the euro yesterday in Zurich, little changed from its previous close. Against the dollar, it traded at 94.94 centimes.
“The Swiss franc is still a very highly valued currency,” Jordan said.
He also commented on the SNB’s recommendations for the capitalization of Credit Suisse, Switzerland’s second-biggest bank by assets, whose shares fell as much as 11 percent on June 14, hitting the lowest level since 1992, when the Swiss central bank surprised the company by urging it to boost capital “during the current year.”
“The stock markets overreacted,” Jordan said. “All information in the financial stability report had already been made public. In addition, the report was very balanced.”
Jordan also said that the SNB’s message in the report “wasn’t fundamentally new”. The SNB only adjusted it to the worsening environment.
“The reason for the more pointed recommendation was the global economic development,” Jordan added. “It has deteriorated over the past months. It is important that big banks have enough capital in such a situation.”