Swiss National Bank Says Franc Still Overvalued

Updated on
  • Swiss central bank keeps deposit rate at minus 0.75%
  • Rates left unchanged hours before Fed announces decision

Switzerlands Central Bank

Photographer: Gianluca Colla/Bloomberg

The Swiss National Bank kept interest rates at record lows and signaled the recent depreciation of the franc hasn’t diminished its willingness to intervene in currency markets if needed.

The central bank, led by President Thomas Jordan, left its rate on sight deposits at minus 0.75 percent, as forecast by all 19 economists in a Bloomberg survey. It also said it will “remain active in the foreign exchange market as necessary.”

While the economy has returned to growth and the franc has weakened, the currency is still 10 percent stronger against the euro than at the start of the year when the SNB scrapped its currency cap. At the same time, new headwinds are emerging, with risks including an economic slowdown in China, the possibility of more euro-area stimulus by the European Central Bank and the U.S. Federal Reserve’s first rate increase in almost a decade.

The ECB is a “big source of uncertainty for the SNB,” said David Marmet, an economist at Zuercher Kantonalbank in Zurich. “If the QE program gets boosted as President Mario Draghi has indicated, the franc would strengthen again and they’d be back at square one. They’d have to intervene again.”

Switzerland’s economy unexpectedly expanded in the second quarter, after the suspension of the SNB’s cap of 1.20 per euro on the Swiss currency prompted a decline in output in the first three months. The franc, which strengthened through parity with the single currency in response to the lifted ceiling, last week briefly fell through the 1.10 per euro mark that the government said local industry could live with.

The franc strengthened after the decision and traded at 1.09674 per euro at 1:11 p.m. in Zurich on Thursday, little changed from the previous day.

“The Swiss franc is still significantly overvalued, despite a slight depreciation,” the central bank said in a statement on Thursday. “The negative interest rates in Switzerland and the SNB’s willingness to intervene as required in the foreign exchange market make investments in Swiss francs less attractive; both of these factors serve to ease the pressure on the franc.”

Supported by domestic demand, the SNB expects growth of “close to” 1 percent, in line with its June prediction. It said consumer prices will decline 1.2 percent, more than the 1 percent previously projected. It sees them falling 0.5 percent in 2016 and rising 0.4 percent in 2017.

On Thursday, the central bank also maintained its target range for three-month Libor at between minus 1.25 percent and minus 0.25 percent.

SNB policy makers have repeatedly threatened interventions, and Jordan last admitted to them at the height of the Greek debt crisis in June. In a speech in Zurich on Sept. 1, he said there was also some room to maneuver on interest rates, and the deposit rate had not yet reached the “absolute bottom.” Economists see the rate potentially going as low as minus 1.25 percent, according to a Bloomberg survey.

“We must keep negative rates for the foreseeable future,” Jordan said in an interview with SRF radio.

Another SNB rate cut could be triggered by an expansion of stimulus in the euro area, Switzerland’s biggest trading partner. The ECB is struggling with feeble growth and inflation at a fraction of its mandate, and Draghi has committed to act again if needed.

The announcement came hours before the Fed concludes its two-day policy meeting. It will announce its decision at 2 p.m. Washington time, and economists are divided over whether the gathering will conclude with a rate increase.

In Switzerland, “we have the same manta-like communication that the franc is overvalued and the central bank will be active if necessary,” said Alexander Koch, an economist at Raiffeisen Schweiz in Zurich. Given the weak price pressures, “there’s absolutely no reason for them to begin to normalize policy.”

For more, read this QuickTake: Currency Pegs