The Swiss National Bank’s cap on the franc is essential given the crisis in the euro area at a time when there is no threat of inflation in Switzerland, central bank Vice President Jean-Pierre Danthine said.
“Clearly there’s no inflation risk,” Danthine said late yesterday during a speech at a business event in Morges, Switzerland. He termed the cap of 1.20 per euro an “absolute necessity.”
The SNB set the cap of 1.20 per euro on the franc in 2011 and cut its benchmark rate to zero to shield the economy from deflation and a recession. Although the euro area is its biggest trading partner, Switzerland has managed to avoid the recession that has befallen the neighboring bloc.
An intensification of the euro area crisis could lead again to appreciation pressure on the franc, Danthine said, reiterating the view taken by the SNB in its most recent monetary policy assessment nearly two weeks ago.
Investors tend to buy the franc as a haven in times of heightened uncertainty.
“We consider that in a situation of normalization, the franc should depreciate,” he said.
The franc was trading 0.2 percent higher at 1.2198 per euro at 7:14 p.m. in Zurich. Against the dollar, it was trading at 94.81 centimes.
The SNB has seen its foreign-currency holdings balloon as a result of its campaign to defend the ceiling. Last year, it spent 188 billion francs ($198 billion) on foreign currencies, up 10 times from 2011. It holds nearly half of its reserves in euros.
Danthine said there is no limit as to how far the SNB could expand its balance sheet and that the SNB is prepared to suffer both significant losses as well as gains as a result of its policy of capping the franc. In 2010, the SNB suffered a record annual loss, which led to calls for then President Philipp Hildebrand to step down, as a result of its currency interventions.
The dictates of monetary policy also come before any drawing-down of the balance sheet, he said.
“If we really want to reduce the balance sheet long-term, we have to resell that forex,” Danthine said. “But we can only do that if monetary policy allows it.”
The SNB can also absorb liquidity quickly via issuance of its own debt, so-called SNB bills, Danthine said.
The SNB expects growth of 1 percent to 1.5 percent this year, it said at its most recent policy review. It stands ready to take further steps to shield the economy if necessary, it also said then.
At its annual review last week, the International Monetary Fund said a tax on excess reserves held by commercial banks with the central bank is a measure that could be enacted if the franc faces severe appreciation pressure again.