SNB Record-Low Rate Cemented as Swiss Reel From Franc BlowCatherine Bosley and Stefan Riecher
Swiss National Bank President Thomas Jordan pledged to keep interest rates at a record low to weaken the franc as he unveiled forecasts showing the economy faces the biggest plunge in prices in six decades.
Speaking after the central bank maintained its rate on sight deposits at minus 0.75 percent, Jordan said that the franc remains overvalued and officials are ready to intervene in currency markets if needed. He also cut the outlook for growth this year.
Switzerland was dealt a shock on Jan. 15 when the central bank abandoned its franc ceiling of 1.20 per euro -- sending the currency surging -- and increased its charge on sight deposits. The SNB isn’t alone in worrying about exchange rates, with the Federal Reserve and the Bank of England highlighting their respective currencies in the past 24 hours.
“We have now to see what is the impact and for the time being this is the right level,” Jordan said in an interview with Bloomberg Television’s Jonathan Ferro in Zurich. “In the very short term, we have to accept that inflation is now below zero, negative, but that will change.”
The SNB predicts an inflation rate of minus 1.1 percent in 2015, which would be the weakest since 1950, according to statistics office data. The central bank sees the rate at minus 0.5 percent in 2016 and at plus 0.4 percent the following year.
“We expect that inflation will be back in positive territories early 2017,” Jordan said.
The economy will grow just under 1 percent in 2015. In December, when the cap was still in place, growth was forecast at 2 percent this year, with consumer prices declining 0.1 percent and rising 0.3 percent in 2016.
In its assessment, the SNB said it will “continue to take account of the exchange-rate situation, and its impact on inflation and economic developments.”
That’s being echoed elsewhere. While the Fed has opened the door to an interest-rate increase this year, Chair Janet Yellen said on Wednesday the dollar’s surge was pushing inflation down. Those comments came hours after Sweden’s Riksbank cited the krona as a danger as it unexpectedly cut its key interest rate and the BOE sounded the alarm about a further appreciation of the pound.
Since early February, the franc has traded weaker than 1.04 per euro, even as the European Central Bank embarked on quantitative easing. The franc appreciated after Thursday’s announcement, to 1.05848 per euro at 1:02 p.m. Zurich time.
Policy makers also kept the range for three-month Libor at between minus 1.25 percent and minus 0.25 percent.
While the SNB has repeatedly said it’s prepared to intervene if necessary even after it gave up the minimum exchange rate, sight deposits -- the cash commercial banks keep with the central bank -- have declined since early February, a sign there’s not been big market activity.
Maxime Botteron, an economist at Credit Suisse Group AG in Zurich, said the SNB will retain a “focus” on the exchange rate, though hold off on additional measures unless the franc appreciates toward euro parity.
Swiss small and medium-sized companies, which export a large portion of their wares to the euro area, are particularly affected by the franc’s surge, and some have introduced reduced working hours in a bid to lower costs. Jordan has warned there may be one or more quarters of economic contraction.
“A noticeable weakening in the economy may be expected, particularly in the first half of the year,” he said on Thursday. He added that a strengthening recovery “will have a supportive effect.”
While the SNB has suffered sharp criticism from investors for the way it gave up the cap, the decision has met with stoic acceptance among others, including the head of LVMH Moet Hennesy Louis Vuitton SA’s timepiece unit and Thomas Matter, Chairman of Neue Helvetische Bank AG and a member of parliament for the fiscally conservative Swiss People’s Party.
The government denied a report earlier this month that it sought to exert more influence over the central bank, including the establishment of a new currency cap.
“The decision to remove the floor has so far been reasonably popular in Switzerland, not least as it has been seen as a symbol of economic strength and independence,” said Beat Siegenthaler, currency strategist at UBS Group AG in Zurich.