SNB Seen Shielding Franc for Longer After ECB Rate CutCatherine Bosley and Andre Tartar
The European Central Bank’s monetary stimulus has prompted economists to extend forecasts for how long the Swiss National Bank will keep its franc ceiling in place.
Only six of 22 participants in the Bloomberg Monthly Survey say the central bank led by President Thomas Jordan will exit its policy to cap the Swiss franc by the end of 2015. A month ago, half of the economists questioned said the SNB would do so by then.
The ECB’s decision this month to unleash unprecedented easing, including a move to a negative deposit rate, raised the prospect that the SNB might even consider following suit. A worsening euro-area economic outlook with looser monetary policy has echoes of 2011, when turmoil prompted investor inflows into the franc that pushed it close to parity with the euro and prompted the SNB to react by creating the cap.
“The recent interest-rate cut by the ECB suggests that the exchange-rate floor may remain in place for longer,” Maxime Botteron, an economist at Credit Suisse Group AG in Zurich, who sees the limit in effect until at least the end of 2015. “As long as inflation remains so low, there is no need to tighten monetary policy in Switzerland.”
The Zurich-based central bank will announce its quarterly policy decision at 9:30 a.m. on June 19, followed by a press conference with all three members of the governing board at 10 a.m. in the Swiss capital of Bern. It will leave its interest-rate target range at zero to 0.25 percent and the cap on the franc unchanged at 1.20 per euro, according to 21 surveyed economists.
“Market participants have learned over the past three years that the SNB is 100 percent determined to defend that cap, so there is little incentive for financial markets to test the SNB’s resolve yet again,” said Timo Klein, an economist at IHS Economics.
The International Monetary Fund has suggested the SNB could charge commercial banks for their sight deposits, should the franc face another bout of appreciation pressure. SNB Governing Board Member Fritz Zurbruegg said in March the bank was ready “from an operation point of view” to take such a step if needed.
The franc has gained 0.7 percent against the euro this year, with the standoff between Russia and Ukraine keeping investors risk averse. The franc hardly budged following the ECB’s announcement in Frankfurt two weeks ago. It traded at 1.2187 per euro at 1:49 p.m. in Zurich today. Analysts see the franc at 1.24 per euro at the end of the year, according to data compiled by Bloomberg.
Not a single economist anticipates supplementary action from the SNB this month in response to the ECB’s measures, the Bloomberg survey also found.
“We don’t expect the SNB to be required to take action to defend the cap,” said Roland Klaeger, an economist at Raiffeisen Schweiz. The franc “remained comfortably above the 1.20 threshold even during the discussions about further ECB easing -- an attempt to test the 1.20 is not likely for the time being,” he said.
The SNB has accumulated foreign-currency reserves equal to nearly three quarters of the economy’s annual output as a consequence of the interventions it waged to the defend the cap. The central bank hasn’t had to step into markets since September 2012, policy makers have said.
Even so, SNB’s Jordan said in late April -- his most recent comment on monetary policy --- that the minimum exchange rate was vital for preventing deflation and that the SNB was prepared to defend the limit.
Extremely low euro-area consumer price growth may prompt the SNB to cut its own inflation forecasts. It currently sees consumer prices stagnating this year, with inflation accelerating to 0.4 percent in 2015 and 1 percent in 2016. Still, economists in the Bloomberg Monthly Survey expect Swiss consumer prices to rise 0.2 percent this year.
The SNB’s 2014 growth forecast is for 2 percent. That’s broadly in line with the prediction by the Swiss government’s group of economic experts, which today cut its growth forecast for 2014 to 2 percent from 2.2 percent, citing a slow recovery in exports. It sees growth of 2.6 percent next year, versus a forecast of 2.7 percent issued last quarter.
“Since introducing the cap, the SNB has maintained a high level of credibility –- something that Jordan deems to be absolutely necessary for the measure to work,” said Tom Bloomfield, an economist at 4Cast in London. “We do not see the SNB having to defend the target rate.”