Swiss Franc Ceiling Seen Nurtured by SNB Through 2014

Swiss central bank watchers are split on how long after 2014 the central bank will keep its ceiling on the franc in place.

Seven of 20 economists in Bloomberg News’s monthly survey predict that the cap of 1.20 francs per euro will be lifted in 2015 and another seven see that happening in 2016. Only three forecast the ceiling being abandoned this year and the same number expects a 2017 exit.

“It will remain as it is for the time being,” said Cornelia Luchsinger, an economist at Zuercher Kantonalbank in Zurich, which predicts the cap will be dropped in 2015. “The Swiss National Bank is in the comfort zone, given the weak inflation rate in the euro area. That speaks for a stronger franc.”

Last week, SNB President Thomas Jordan affirmed the need for the minimum exchange rate, which was introduced in September 2011 to stave off haven flows from the euro area. Jordan, citing price pressures, said it would remain the focus of monetary policy “for the foreseeable future.” The SNB sees consumer prices rising 0.2 percent this year and 0.6 percent in 2015, well below the central bank’s price stability threshold of 2 percent.

Weaker Franc

Economists in the survey expect consumer prices to increase 0.4 percent this year, before accelerating to 0.9 percent in 2015. They see gross domestic product rising 2.1 percent and 2.2 percent, respectively.

The SNB predicts an economic growth rate of 2 percent for 2014. Even at such a pace, SNB board member Fritz Zurbruegg said last week that the cap is needed in case the euro area’s fiscal crisis flares up again.

While the region’s economy emerged from a record-long recession in the middle of last year, it is still struggling to grow amid subdued inflation and unemployment at a euro-era high.

The Swiss franc has fallen 0.7 percent against the single currency this year after depreciating 1.6 percent in 2013. It’s the second-worst performer of the 10 developed-nation currencies tracked by Bloomberg’s Correlation Weighted Indexes in 2014. It traded 0.2 percent higher at 1.2356 against the euro at 10:02 a.m. in Zurich today.

Mortgage Risks

The SNB’s loose monetary policy has kept mortgages cheap and spurred a real-estate boom in Switzerland. Apartment prices are 27 percent higher than they were in 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.

According to the survey, 71 percent of economists expect the buffer to be raised, and more than half of those predicting an increase see that happening before the end of March. The median estimate is for the measure to be boosted to 2 percent.

“I could imagine the SNB going for 2.5 percent” if the central bank pushes for an increase of the buffer, said Claudio Saputelli, an economist at UBS AG in Zurich and co-author of the bank’s quarterly property bubble index. As some Swiss regions already have seen prices peak, the SNB could wait a bit and not request it to be raised until the second half of the year, he told reporters in Zurich today. Even so, Saputelli said he wasn’t sure the SNB even would be happy with 2.5 percent.

Buffer Increase

“When it comes to highlighting the issue, there isn’t that much difference between 1 percent and 2.5 percent,” he said.

At the SNB’s policy review in December, Vice President Jean-Pierre Danthine said that mortgage and real-estate markets remain at risk of overheating. Raising interest rates to rein in the property market isn’t an option for the SNB and Danthine said last August the SNB won’t raise rates while the cap is in place.

“We expect the SNB will ask for an increase of the buffer,” said Christian Lips, an economist at Nord LB in Hanover, who sees such a move in the second quarter. “We suspect the SNB would ask for 2 percent, which would allow them to retain some ammunition for a rainy day.”

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