The Swiss National Bank will maintain the cap on the franc as the global economic recovery proceeds sluggishly, board member Fritz Zurbruegg said.
“The minimum exchange rate will remain a necessary instrument for the foreseeable future,” the policy maker said at a reception of money-market traders in Geneva yesterday. “The monetary policy we have conducted to date will continue to apply without any restrictions.”
Citing the risk of deflation and a recession, the Zurich-based central bank set a cap of 1.20 per euro on the haven franc in September 2011, threatening unlimited currency interventions to defend it. While consumer prices are falling, the economy has escaped a recession, managing to stay relatively unscathed from the debt crisis that has afflicted the neighboring euro area.
In Switzerland, gross domestic product is now 5 percent above its pre-crisis level. Even so, growth has been driven by domestic consumption due to high immigration and annual output in per capita terms has not yet returned to its pre-crisis level, Zurbruegg said, adding that the output gap remains negative.
The franc is still 10 percent above its long-term average, in trade-weighted, inflation-adjusted terms, he said. Zurbruegg reiterating that the central bank remains “prepared to enforce the minimum exchange rate by buying foreign currency in unlimited quantities if necessary, and to take further measures as required.”
The franc has depreciated 2 percent against the euro this year. It traded at 1.2320 per euro at 9:28 a.m. in Zurich today, little changed from yesterday. Against the dollar it stood at 91.30 centimes.
“Is a return to normal on the horizon?” Zurbruegg asked, noting that the global recovery is “merely sluggish” and there is still the risk of things worsening again. “Yes, but much more slowly than expected.”
The SNB sees growth of between 1.5 percent and 2 percent for this year, while it predicts consumer prices will fall 0.2 percent. There is no threat to price stability in the medium term, Zurbruegg said.
The SNB has accumulated 434.7 billion Swiss francs ($475 billion) in foreign currency reserves due to its campaign to defend the ceiling on the franc. The central bank hasn’t had to intervene in currency markets for a year, Zurbruegg said, reiterating comments by SNB President Thomas Jordan a month ago.
Because of extremely loose monetary policy, the Swiss real-estate market is in the throes of its biggest property market boom in two decades. The SNB has repeatedly warned of overheating.
“Since low interest rates can be expected to persist in Switzerland for some time yet, we are keeping a very close watch on developments in the mortgage and real-estate markets,” Zurbruegg said.