SNB Vows to Defend Franc Cap as Euro Economy Struggles

The Swiss National Bank promised unlimited purchases of foreign currency to defend the franc ceiling as the euro-area recovery struggles to keep momentum.

The central bank, led by President Thomas Jordan, maintained its cap on the franc at 1.20 per euro and kept the target range for its benchmark interest rate unchanged at zero percent to 0.25 percent, as forecast by all 22 economists in a Bloomberg News survey. Jordan said the franc is “still high.”

The Zurich-based SNB set the ceiling two years ago, citing the risk of deflation and a recession after investors uneasy about the European debt crisis pushed the haven currency nearly to parity with the euro, threatening to choke off exports. While Jordan said today that the SNB hasn’t needed interventions to enforce its policy since September 2012, economists don’t expect the central bank to lift the cap before 2015, according to a separate survey.

“The SNB currently faces no pressure to exit its very expansionary monetary policy,” Maxime Botteron, an economist at Credit Suisse, said in a note. “For 2014, we expect the SNB to keep the exchange rate floor unchanged.”

While the euro area exited a record-long recession in the second quarter, its economic rebound came close to a halt with growth of just 0.1 percent in the three months through September. The European Central Bank, which sees the 17-nation economy contracting 0.4 percent this year, cut its key interest rate to a record low of 0.25 percent in November and ECB President Mario Draghi says officials are ready to keep borrowing costs low for an extended period to rekindle growth and prevent deflation from materializing.

Complex Situation

The ECB’s latest rate cut has created a “complex situation” for Switzerland, Jordan said on Nov. 8, adding he would have to “wait and see” how it played out.

The Swiss franc was little changed today at 1.2225 per euro as of 9:51 a.m. in London. It was at 88.79 centimes per dollar.

The SNB kept its 2013 forecast for growth unchanged, saying it expects economic expansion of between of between 1.5 percent and 2 percent. For 2014, the SNB sees gross domestic product rising about 2 percent.

“Given the vulnerable economic situation abroad, downside risks still prevail for Switzerland,” Jordan said.

Inflation Outlook

The central bank adjusted its inflation forecast “downwards slightly.” Officials sees consumer prices falling 0.2 percent this year before climbing 0.2 percent in 2014. They predict 0.6 percent inflation in 2015.

Still, “inflation abroad is receding, especially in the euro area,” Jordan said. “The inflation differential between Switzerland and the euro area has thus decreased significantly.”

The Swiss economy is in a more robust state than the euro area’s: The jobless rate as defined by International Labour Organisation was at 4.2 percent at the end of the second quarter and exports -- which long suffered due to the unfavorable exchange rate -- helped drive growth in the third quarter, when gross domestic product rose 0.5 percent. Even so, annual consumer prices fell for 21 months after the cap’s introduction and only started rising again in November.

The Swiss currency is the second-best performer of the 10 developed-nation currencies tracked by Bloomberg’s Correlation Weighted Indexes this year, having climbed 7.1 percent. At 8.5 percent the euro tops the ranking.

Property Boom

The SNB’s policy of zero interest rates has kept mortgages cheap and spurred a real-estate boom. Apartment prices have risen 27 percent since 2008, while those of single family homes have gained 24 percent.

With mortgage lending growing at a faster pace than the economy, the SNB has sounded the alarm. As of September, banks have been required to hold a capital buffer equivalent to 1 percent of mortgage-related assets. The measure, enacted by the government at the request of the central bank, can be raised to as much as 2.5 percent.

“In an environment of persistently low interest rates, the danger of a further build-up of imbalances on mortgage and real estate markets remains considerable,” the SNB said. “For this reason, the SNB continues to monitor the situation very closely, and regularly assesses whether the countercyclical capital buffer should be adjusted.”