SNB Seen Sticking With Cap in 2014 Amid Haven Demand: Economy

Swiss National Bank officials will defend their cap on the franc for at least another year as they endure pressure from potential policy easing in the euro area to investor demand for safe assets, economists say.

No respondent in the Bloomberg Monthly Survey predicted that the SNB will allow the franc ceiling of 1.20 per euro to lapse in 2014. The poll of 21 economists found that eight see the SNB doing so in 2015, while six see the ceiling expiring in 2016 and two in 2017.

The Zurich-based central bank set the minimum exchange rate in September 2011 to protect the Swiss economy from the risk of deflation and a recession after haven flows pushed the two currencies near parity. SNB President Thomas Jordan affirmed last month that the cap will remain necessary for the foreseeable future, citing increasingly slack consumer price growth.

“The fact they’ve cut their inflation forecast once again, not only for this year but also for 2015, is surely a sign that they don’t feel the slightest urge to do anything with the cap anytime soon,” said Martin Gueth, an economist at LBBW in Stuttgart. “Given they haven’t had to intervene to defend it of late, they’re in a relatively comfortable position.”

Last month, the SNB cut its inflation forecast and now predicts consumer prices will stagnate this year, with inflation of just 0.4 percent in 2015. Economists in today’s Bloomberg survey predict an inflation rate of 0.3 percent in 2014 and of 0.8 percent next year.

Strong Franc

The franc was overvalued by 12 percent in February, according to an SNB gauge. The Swiss currency’s persistent strength has been questioned even by the SNB, Board Member Fritz Zurbruegg said in February, highlighting that he had expected a depreciation.

The franc traded at 1.2161 at 1:37 p.m. in Zurich today. Against the dollar it stood at 87.65 centimes.

More than half of the economists in a second survey of 30 said the risk of a setback to the euro area’s recovery kept the franc strong.

While the 18-nation currency union has returned to growth, euro-area inflation is at the weakest in more than four years. European Central Bank President Mario Draghi said last week that he has “unanimous” backing from policy makers for unconventional measures if needed. The SNB’s governing board has repeatedly said it is prepared to take supplementary measures should appreciation pressure on the franc return.

History Lesson

“The market isn’t banking on a collapse of the euro, but there are still risks in the euro area,” Gueth said. “I think that many in the market just say they’ll stick with their franc positions given that they cost hardly anything.”

Concerning what sort of a strategy the SNB might pursue when it finally does decide tighter policy is warranted, Zurbruegg in February referred to the cap the SNB set against the German mark in 1978, pointing out it had never formally been lifted. Manuel Andersch, an economist at Bayerische Landesbank in Munich, says he thinks the SNB will pursue a similar policy for the current ceiling.

“We don’t expect that the SNB will ever officially announce an end to its cap on the Swiss franc,” Andersch said. “They will rather conduct an exit through the back door by scaling back references to the cap.”

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