SNB Will Maintain Franc Defense as Ceiling Kept on Hold: Economy

Swiss Central Bank President Thomas Jordan
Swiss central bank President Thomas Jordan said in a speech on Sept. 3 that any gain in the franc would pose a “very substantial threat” to the economy and spark the risk of “deflationary developments.”. Photographer: Gianluca Colla/Bloomberg

The Swiss central bank pledged to uphold its yearlong defense of the franc by purchasing foreign currencies in “unlimited quantities” as it cut its inflation and economic growth forecasts.

The Swiss National Bank, led by President Thomas Jordan, today maintained the currency 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 at zero, as forecast by all 16 economists in a Bloomberg News survey.

The SNB’s foreign-currency reserves increased 64 percent to 418 billion francs ($446 billion) in the year through August as policy makers stepped up euro purchases to stave off attacks spurred by the region’s turmoil. With the economy faltering and consumer prices falling on an annual basis for almost a year, the central bank will maintain the cap into 2013, economists at UBS AG, Julius Baer Group Ltd. and Credit Suisse Group AG said.

“The franc could appreciate massively if the SNB dropped its ceiling and they will keep it on hold for the foreseeable future,” said Maxime Botteron, an economist at Credit Suisse in Zurich. Still, “I expect currency purchases to continue to decrease if tensions on the financial markets diminish further.”

The Swiss franc, which is seen as a haven in times of global turmoil, traded at 1.2124 versus the euro as of 11:31 a.m. in Zurich. It was at 93.87 centimes versus the dollar. The Stoxx Europe 600 Index slipped 0.4 percent, while Switzerland’s benchmark stock index was little changed.

Fed Decision

The dollar weakened amid speculation the Federal Reserve will announce it will buy bonds under a program of quantitative easing. It slid 0.2 percent to $1.2920 per euro after touching $1.2937 yesterday, the weakest since May 11.

The Federal Open Market Committee plans to release a statement at about 12:30 p.m. in Washington. The Fed will also release forecasts for unemployment and inflation and Chairman Ben S. Bernanke holds a press conference.

In their inflation projections, Swiss policy makers forecast consumer prices to fall 0.6 percent this year before increasing 0.2 percent in 2013 and 0.4 percent in 2014. In June, they had seen prices declining 0.5 percent in 2012, followed by gains of 0.3 percent and 0.6 percent, respectively.

There is “no threat of inflation” in the “foreseeable future,” the SNB said. It also cut its 2012 growth forecast to 1 percent from a June projection of about 1.5 percent, saying that downside risks remain high “in the near term.”

“The SNB will not permit an appreciation of the franc, given the serious impact this would have,” it said. “It stands ready to take further measures at any time.”

Euro ‘Insecurity’

Jordan told Swiss radio DRS1 in an interview broadcast today that the SNB is “ready to intervene at any time if needed.”

“It’s not just speculators that are to blame that we have a strong franc,” he said. “We have a huge insecurity of market participants about the future of the euro, about the future of other currencies, and that’s why the franc has gained a lot in attractiveness. That forces us to be active around the clock and conduct a policy that’s making it totally clear to markets that we’ll impose the minimum exchange rate under any circumstances.”

The SNB introduced the ceiling on Sept. 6, 2011, after the franc’s surge to near parity with the euro sparked deflation threats. While the franc breached the ceiling just once in April, decreasing import costs have pushed down consumer prices.

Currency Hoard

To protect the economy, policy makers have been forced to pile up foreign-currency holdings amounting to about 73 percent of gross domestic product. Euros accounted for 60 percent of total reserves at the end of the second quarter, up from 52 percent in the previous three months.

Pressure on the ceiling eased over the past month, after the European Central Bank pledged on Aug. 2 to purchase government bonds of distressed nations such as Spain and Italy in tandem with Europe’s rescue fund. The Swiss franc weakened to an almost eight-month low of 1.2155 per euro last week.

ECB President Mario Draghi unveiled details of the euro-crisis plan last week, saying the central bank would spend as much as needed to contain borrowing costs in countries if they sign up to bailout conditions first. ECB council member Panicos Demetriades said in a Bloomberg interview yesterday that the ECB threat may mean that “in the end, action is not needed.”

“No one will speculate against the unlimited firepower of a central bank,” he said.

Economic Outlook

Still, with the euro region’s economic slump deepening and at least five member states including Italy and Spain in recessions, the Swiss economy may struggle to regain strength after shrinking 0.1 percent in the second quarter. Manufacturing output contracted for a fifth straight month in August and exports declined in July.

Pressure on the franc “should abate thanks to the market reaction to the positive announcements from the ECB” and the German court’s endorsement of the euro bailout fund, said Julien Manceaux, an economist at ING Group in Brussels. “This does not mean that demand will not return, but for the moment further measures by the SNB to support the floor -- capital flow limitations or negative interest rates -- are not likely.”

In Asia, India’s capital-goods production, a gauge of corporate expenditure on factories and machinery, slid in July for a fifth straight month, the longest stretch since declines over most of 2009, a report showed yesterday. Central banks in South Korea, Indonesia and the Philippines today kept their benchmark interest rates unchanged.

In the U.S., the Fed will probably announce a third round of bond purchases, according to almost two-thirds of economists in a Bloomberg survey, while also extending the duration of its zero-interest-rate policy into 2015.

U.S. producer prices rose 1.2 percent in August from July, based on a Bloomberg survey before the Labor Department reports the figure later today. Consumer prices gained 0.6 percent, a separate survey showed before data tomorrow. Both increases would be the biggest since 2009.

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