SNB’s Jordan Says Cap ‘Crucial Tool’ to Protect Economy

Swiss National Bank President Thomas Jordan said ceiling on the franc remains essential to protect the economy.

“The minimum exchange rate is very important,” Jordan said on Oct. 12 in Washington, where he attended the joint annual meetings of the International Monetary Fund and the World Bank. “It remains a crucial tool of our monetary policy in order to avoid a tightening of monetary conditions in Switzerland.”

The Zurich-based SNB implemented the cap of 1.20 per euro in September 2011 after the franc came close to parity with the bloc’s currency. The franc has depreciated about 2.5 percent versus the euro since the European Central Bank announced an unprecedented bond-buying program in September 2012 to defend the euro. This has allowed the SNB to hold off from intervening in currency markets to protect the limit for more than a year, Jordan said last week.

“We still have a very strong currency,” Jordan said.

In an interview with Swiss national broadcaster SRF, Jordan said the U.S. “fiscal situation,” with lawmakers wrangling over the budget, didn’t mean the SNB would change its investment strategy.

“I am not scared that we will lose money on these bonds in the mid or long term,” he said, referring to the SNB’s 27 percent foreign-currency holdings in U.S. dollars, most of which are in highly rated bonds.

Policy Normalization

In 2012, the SNB spent 188 billion francs ($206 billion) buying foreign currency to defend the ceiling. The central bank held a total of 432.4 billion francs of foreign currencies at the end of September, equal to about three-quarters of Switzerland’s annual economic output.

The franc has fallen 2.1 percent against the euro this year as the fiscal crisis in the 17-nation currency union retreats. It traded at 1.2328 at 2:34 p.m. in Zurich today.

Without the cap, the economy would have suffered a recession, Swiss policy makers have said, and they have also repeatedly stressed there is no risk of inflation for the foreseeable future.

Speaking in the radio interview about the loose monetary policy of central banks generally, Jordan said he couldn’t predict when a normalization might be achieved.

“All depends on the developments of the real economy and inflation,” he said. “It could take a lot of time -- or it might happen very quickly.”

According to a Bloomberg News survey of nine economists conducted Oct. 4 to Oct. 9, the SNB will remove the ceiling in the fourth quarter of 2014 at the earliest. One economist expects the central bank to exit the cap in that quarter, with four seeing the ceiling to be dropped in 2015 and four in 2016.

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