SNB Seen in No Rush to End Cap as 1970s Offer Exit Clue

The Swiss National Bank will stick with its expansive policy for at least another year, economists said, giving officials a chance to read up on their history for ideas on an exit strategy.

A majority of analysts in Bloomberg’s monthly survey said the board led by Thomas Jordan will abandon the franc cap of 1.20 per euro next year at the earliest. About half say the SNB will keep up the defense until 2016.

Introduced in 2011 after haven flows pushed the franc to near parity with the euro, it was the second time the central bank in Zurich set a minimum exchange rate, after its 1978 measure to control the franc’s level versus the German mark. SNB Board Member Fritz Zurbruegg evoked that measure last month, highlighting that it was never formally abandoned.

“There will be no official announcement of the SNB on that,” said Manuel Ferreira, a portfolio manager at Zuercher Kantonalbank in Zurich. “It wouldn’t be very clever to announce you’re giving up the cap. It would be too easy for the investors who are betting against it.”

The central bank will announce its next monetary-policy decision at 9:30 a.m. on March 20. The three-member board will leave the benchmark interest rate at zero and the cap unchanged this week, according to all economists in a separate Bloomberg News survey.

SNB Waits

Even with the Swiss economy forecast to grow faster than the neighboring euro area this year, the SNB will keep defending the ceiling until other central banks change course, according to the survey. Eighteen of 22 economists said the currency policy will remain in place as long as the Federal Reserve, the Bank of England and the European Central Bank maintain their record-low interest rates.

“In our baseline scenario, the crisis fades, the pressure on the franc -- caused by its haven status -- diminishes and the currency weakens,” Zurbruegg told Le Temps in an interview published Feb. 21. “Remember, the minimum exchange rate of 1978 was never formally abandoned.”

The currency’s haven appeal was demonstrated again this month when emerging-market turbulence followed by tensions between Russia and Ukraine over the Crimea region sent the franc to a 14-month high against the euro.

The SNB will “continue to see the need to keep the cap in place to nip any speculative flight into the Swiss franc in the bud,” said Timo Klein, senior economist at IHS Economics in New York.

Franc Advance

The franc has appreciated 1.2 percent this year, based on Bloomberg Correlation Weighted Indexes, making it the third-best performer behind the New Zealand dollar, which has climbed 3.9 percent, and the yen, which has gained 2.8 percent. It traded at 1.2158 per euro at 12:34 p.m. in Zurich today.

SNB Vice President Jean-Pierre Danthine said last year the central bank can’t raise rates while it has the cap in place.

“Over time, they may stress the cap less in their statements,” ZKB’s Ferreira said. “But when the SNB will raise the target for the three-month Libor, that will be the moment where it’s clear that they’ve gotten rid of the cap.”

Buttressing those views, Jordan said in a Basler Zeitung interview this month that the cap remains the central bank’s key instrument, given projections for very moderate inflation over the next three years.

The SNB, which forecasts price growth of 0.2 percent this year, will also update its projection for consumer prices and growth on March 20. According to the Bloomberg poll, the economy will grow 2 percent this year, with inflation accelerating to 0.4 percent. In 2015, gross domestic product is seen increasing 2.1 percent.

Franc Fortress

Other central banks have begun to change policy: The Fed is scaling back its monthly bond purchases, while New Zealand last week became the first developed nation to exit record-low borrowing costs. The Bank of England will keep its key rate on hold until the first half of 2015 and the ECB will hold tight until at least the third quarter of that year, according to Bloomberg surveys published last week.

“The strength of the franc is like a fortress,” said Janwillem Acket, chief economist at Julius Baer Group Ltd. in Zurich. “The others have to go ahead with a normalization of rates -- the SNB will just have to sit it out.”

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