Zurbruegg Says SNB Can Use Negative Rates If Needed

The Swiss National Bank will maintain the cap on the franc for now and is able to support it with negative interest rates if needed, Board Member Fritz Zurbruegg said.

“We’ve stressed that we have an array of assets that can be used to defend the minimum exchange rate,” Zurbruegg said yesterday in Zurich, responding to a question about how the SNB would react to the European Central Bank cutting its deposit rate. “From an operational point of view, we’re ready to use negative rates as a reinforcement” if so required, he said.

The Swiss central bank set an upper limit on the franc of 1.20 per euro in September 2011, citing the need to shield the economy from deflation and a recession. The Zurich-based institution has repeatedly said it can take additional measures if needed. ECB policy makers meet on April 3 in Frankfurt. Only one of 24 economists in a Bloomberg News survey expects the deposit rate to be cut below zero next week.

“The minimum exchange rate remains necessary for the foreseeable future,” Zurbruegg said. “Should it become necessary, we will therefore enforce the minimum exchange rate by buying foreign currency in unlimited quantities.”

The International Monetary Fund backed the SNB’s cap earlier this week, saying the franc remained “moderately overvalued.” If the currency faces further appreciation pressure, the SNB should consider charging commercial banks on excess reserves, the IMF said, repeating an assessment it already gave a year ago.

Strong Franc

Citing low inflation rates in other countries and a slight appreciation of the franc, the SNB at its policy review last week cut its forecast and predicts annual consumer prices to stagnate this year, before climbing 0.4 percent in 2015. Inflation will accelerate to 1 percent in 2016, it said.

“The value of the Swiss franc is still high,” Zurbruegg said. “Only the minimum exchange rate can prevent an undesired tightening of monetary conditions, should the upward pressure on the Swiss franc increase once again.”

The franc has appreciated 0.6 percent against the euro this year. It traded at 1.2193 per euro at 11:23 a.m. in Zurich today. Against the dollar it stood at 88.88 centimes.

The majority of economists say the SNB will maintain the ceiling for at least another year, according to a survey by Bloomberg News published earlier this month.

Because the SNB has at times intervened heavily in currency markets to defend its ceiling on the franc, its foreign currency reserves have swollen to more than 70 percent of annual economic output.

Zurbruegg yesterday reiterated that the SNB’s investment policy is designed to serve the objectives of monetary policy, that it invests in a passive manner to minimize market disruptions, and that 16 percent of its foreign currency holdings are in equities.

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