SNB Will Cap Franc as Long as Deflation Risks Persist
The Swiss National Bank will maintain its cap on the franc as long as necessary to ward off deflation and doesn’t consider creating a sovereign wealth fund for its currency reserves “sensible,” board member Fritz Zurbruegg told L’Hebdo.
“The floor rate will remain in force as long as necessary to carry out our mandate of maintaining price stability,” Zurbruegg said, according to an interview with the French-language newspaper published tomorrow. “The current exchange rate still seems overvalued.”
The Zurich-based SNB set a cap of 1.20 per euro on the franc in September 2011 to lessen the risk of deflation and a recession after investors pushed the Swiss currency close to parity with the euro. Even so, consumer prices dropped for a 19th month in April, extending their longest slump in at least four decades.
In response to whether the SNB might shift the cap to another level, as labor unions have urged, Zurbruegg said the SNB wouldn’t respond to particular economic interests.
“The risk of another significant rise of the Swiss franc against the euro can’t be ruled out,” he said.
The SNB has amassed 433.6 billion francs ($447 billion) of foreign currency -- about three quarters of annual output -- due to its efforts to defend the ceiling. That’s raised questions of how it might invest the money.
The SNB doesn’t take strategic stakes in companies, and diversifies investments by replicating indexes for a given currency, Zurbruegg said, repeating comments made last month. Because of its strategy to remain a passive investor, the SNB sees little value in founding a sovereign wealth fund to hold its reserves, he said.
“Creating such a fund for investing the SNB’s currency reserves wouldn’t be sensible,” according to Zurbruegg. SNB President Thomas Jordan made a similar remark last year.
In adopting loose monetary policy, central banks around the world were trying to foster economic growth and weren’t engaging in a currency “dumping,” Zurbruegg said.
Switzerland’s real-estate market is experiencing its biggest rise in two decades, thanks to the SNB’s easy monetary policy, with the regions of Zurich and Geneva having seen a particularly strong increase in apartment prices.
“What we currently see is due to the persistence of low interest rate that, according to our predictions, will probably stay there,” Zurbruegg said.
The SNB has repeatedly urged banks to be cautious when allotting mortgages. The government has also ordered lenders to hold an extra 1 percent of risk-weighted assets linked to domestic residential mortgages. They have until the end of September to comply.
The upward trend in house prices remains a concern, though that doesn’t necessarily mean the new requirement won’t prove effective, Zurbruegg said.
“It’s still to early to judge the impact of this measure” he said. “We’ll continue to monitor developments on the mortgage and real-estate markets closely and periodically evaluate whether to adjust or disable the countercyclical capital buffer.”
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