SNB Danthine Says Franc Cap Still Essential: Zentralschweiz

The Swiss National Bank’s currency cap remains necessary, and the central bank won’t exclude taking further steps should the crisis in the euro area intensify, SNB Vice President Jean-Pierre Danthine said.

“We find ourselves in a situation in which the franc is still highly valued, and we can’t allow a tightening of monetary conditions,” Danthine said in an interview with the Lucerne-based Zentralschweiz am Sonntag published today. “It is rather a question whether to be a bit more expansive.”

The franc, which investors buy at times of heightened uncertainty, almost touched parity with the euro in August of 2011, threatening to plunge Switzerland into a recession and prompting the SNB to set a cap of 1.20 per euro on the currency a month later.

The state of affairs in the euro area remains fragile and the franc could face further appreciation pressure, Danthine said. “As the economic situation improves only very slowly, especially in the euro area, a change of course in monetary policy in the short term is highly unlikely,” he said.

The Zurich-based SNB, led by President Thomas Jordan, has repeatedly said it would take additional steps if needed. The International Monetary Fund gave a green light on supplementary measures, saying in March the Swiss central bank should charge lenders on excess reserves if the franc were to rise again.

The SNB is continually analyzing events and could take action if required, Danthine said. “We have always said that we exclude nothing,” he said.

Withdrawing Liquidity

The liquidity generated by the SNB’s currency interventions to defend the ceiling would have to be withdrawn in the medium and long term, though there is “absolutely no risk” of inflation now, he said.

“The technical means to withdraw liquidity at the right moment are available,” he said. “Knowing when the time is right is and will remain the great art of monetary policy.”

Danthine reaffirmed the central bank’s forecast for the Swiss economy to grow from 1 percent to 1.5 percent this year, as the euro area only slowly recovers from its debt crisis. “The slight improvement in the second half is expected to continue in 2014,” he said.

Danthine also said there are no clear signs of a slowdown in the real estate market, with condominium prices around the country unjustifiably high, even when taking into account high immigration.

Home Prices

The prices of apartments and single-family homes have risen sharply in recent years, as the SNB’s policy makes mortgages cheap. In February, the government announced banks must hold additional capital as a countercyclical buffer to guard against risks on their mortgage books. They have until the end of September to comply.

“The ideal scenario is that a slowing-down occurs and a change in the trend becomes visible,” he said. “But should the imbalances grow, a further increase in the capital buffer is certainly one of the possible measures.”

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