SNB Still Has Currency Firepower to Fight ECB Policy Fallout

  • Balance sheet could hit 120% of Swiss annual output: survey
  • Franc interventions have pushed assets to ~95% of GDP

The Swiss National Bank has room to restart major currency purchases if needed to weaken the franc before its credibility starts to suffer, according to economists in a Bloomberg survey.

Switzerland is bracing for more European Central Bank stimulus, which could push the euro lower. Having already spent hundreds of billions of francs on interventions, that has analysts asking how much more ammunition the SNB has and how willing it is to take greater financial risks.

According to a Bloomberg survey, the central bank can allow its assets to climb to 120 percent of the country’s economic output before its readiness to act gets thrown into question. That figure, based on the median of 13 estimates, would give the SNB about 165 billion francs ($163 billion) of leeway.

“The expansion of its balance sheet at the current pace should not pose a threat to SNB’s credibility,” said Markus Schmieder, an economist at Wellershoff & Partners Ltd. in Zurich. “However, an actual expansion of the ECB’s QE could quickly increase the appreciation pressure on the Swiss franc and accelerate the pace of balance-sheet expansion.”

The SNB’s credibility came under fire earlier this year when it gave up its ceiling on the franc of 1.20 per euro just days after a member of its governing board had affirmed the policy. Defending the decision, officials cited the need for ever-larger interventions and risks that were out of the proportion to the benefit to the economy.

The central bank’s balance sheet has expanded 9 percent this year and stood at 614 billion francs as of Sept. 30 -- the equivalent of 95 percent of Swiss gross domestic product. Its assets have increased almost fivefold since the start of 2008.

“After its antics at the start of the year, catching everyone off guard, it appears to have regained credit among most investors -- if not all,” said Alan McQuaid, chief economist at Merrion Capital in Dublin.

This is reflected in the exchange rate. The franc has traded weaker than 1.06 per euro since early August and hit 1.10 in September. It stood at 1.08224 per euro at 12:13 p.m. in Zurich on Wednesday.

The Swiss government said on Wednesday that it had held its annual closed-door meeting with SNB President Thomas Jordan, who had explained the central bank was active on foreign exchange markets as necessary.

The central bank had 551 billion francs of foreign currency reserves as of October, much of it held in dollars and euros, while its assets also include gold and Swiss franc securities. It typically makes an annual payment to cantonal governments, who rely on the money for local spending, and has warned the payout could be suspended should it incur a loss.

Political Headwinds

The scrapping of the franc ceiling found favor with fiscally conservative Swiss People’s Party, the largest in parliament’s lower house, which has previously lambasted the SNB for incurring losses due to interventions.

“It’s not that the SNB would fear to lose credibility at a balance sheet amounting to 100 percent of GDP, but political headwind would clearly intensify,” said Roland Klaeger, an economist at Raiffeisen Schweiz.

The strong franc has put pressure on the Swiss economy, with the central bank forecasting growth of just under 1 percent this year. Consumer prices are set to fall in 2015 and 2016, with the annual inflation rate turning positive only the following year. The central bank will issue a new inflation forecast and a first take on 2016 growth at its next policy meeting on Dec. 10.

According to the survey of economists, growth is seen at 0.9 percent this year, accelerating to 1.2 percent in 2016 and 1.7 percent in 2017.

‘Watershed Mark’

In lieu of the cap, the SNB introduced a negative deposit rate to dissuade investors from holding francs. The rate, currently at minus 0.75 percent, can go as low as minus 1.25 percent, the Bloomberg survey also found.

“Even if doubts grow about the willingness of the SNB to expand its balance sheet even further as reserves increase, there is no watershed mark after which the market’s perception suddenly turns around,” said Timo Klein, senior economist at IHS Global Insight in Frankfurt. “Credibility is more a question of the SNB doing what it says, rather than depending on the size of its balance sheet.”

To be sure, not all economists believe there is a line in the sand for the balance sheet, which -- once crossed -- dents credibility.

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