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Jordan Says Cap Shifting, Negative Rates in SNB’s Toolkit

Swiss National Bank President Thomas Jordan
Swiss National Bank President Thomas Jordan said, “An appreciation of the franc would endanger price stability and have structurally grave consequences for the Swiss economy.” Photographer: Valentin Flauraud/Bloomberg

Swiss National Bank President Thomas Jordan said a shift of the cap on the franc and negative interest rates are among steps the central bank could take, prompting the franc to break through 1.26 per euro for the first time in two years.

“The adjustment of the minimum exchange rate is something that principally belongs to the options if needed,” Jordan told reporters in Frankfurt yesterday. “We will maintain the minimum exchange rate for as long as necessary.”

The SNB set a cap of 1.20 francs per euro in September 2011 to ward off deflation and a recession, having already cut rates to zero. While trade unions have called on the central bank to change the limit to make the franc still weaker, the SNB previously said the level of the cap on the franc couldn’t just be shifted at will.

“An appreciation of the franc would endanger price stability and have structurally grave consequences for the Swiss economy,” Jordan said, adding that he isn’t expecting any inflation risks for the foreseeable future.

The franc fell as much as 1 percent after Jordan’s comments, slipping as low as 1.2650, its weakest since May 2011. The franc stood at 1.2624 per euro at 5:15 p.m. in Zurich. Against the dollar it weakened through 98 centimes per dollar, the lowest level since Aug. 10, before trading at 97.99 centime.

‘Unpredictable’ Move

“The next move by the SNB has become unpredictable,” Peter Rosenstreich, chief foreign exchange analyst at Swissquote in Geneva, said in an e-mailed note. “As always traders are getting way ahead of themselves by speculating that the SNB will act with some new measure.”

The SNB, which holds its next policy review on June 20, has repeatedly said it could take further measures, if it deems them necessary. Swiss consumer prices have fallen for 19 consecutive months and the Zurich-based institution expects an annual decline of 0.2 percent in 2013. Still, the SNB sees the Swiss economy growing as much as 1.5 percent this year.

“We never excluded that we could introduce negative interest rates,” Jordan said, adding that such rates have “side effects.”

The International Monetary Fund said yesterday that the SNB could implement a charge on excess deposits commercial lenders hold with the central bank, echoing comments it made in March. That form of negative rate could be passed by banks to clients and may result in higher mortgage rates that could help damp the country’s booming real-estate market, the IMF said, adding that this could also hinder financial intermediation.

No Euro

Switzerland, which isn’t a member of the European Union, isn’t planning to join the euro, Jordan also said. “It’s not a realistic scenario for the foreseeable future,” he told reporters in comments embargoed for today.

The SNB is part of a group of central banks around the world that have eased policy to foster growth. Distortions could develop “sooner or later” as a consequence of so much stimulus, with a normalization having to take place at some point, Jordan said.

“The hope is that the economy recovers before inflation kicks in,” he said referring to the global economy rather than just Switzerland. “That’s the theory -- how it’ll be practically remains to be seen.”

The SNB has accumulated foreign currency reserves equal to about three quarters of annual economic output due to its interventions to maintain its ceiling on the franc. It also holds 1,040 tonnes of gold, most of which is stored domestically.

“We think about many things but not about buying or selling gold,” Jordan said. “That doesn’t have to remain the case for eternity, but from today’s perspective, we’re not striving for change.”

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