Switzerland's Currency Battle May Intensify If ECB Expands QE

  • ECB debates stimulus in light of weak growth, inflation
  • Survey finds further deposit-rate cut another option for SNB

The Swiss National Bank may have to sell francs again should quantitative easing be expanded in the euro area.

Sixty-three percent of economists predict the central bank will respond with market interventions to stop the currency from appreciating, according to Bloomberg’s monthly survey. Forty-two percent forecast another cut to the deposit rate.

With more European Central Bank stimulus coming down the pipeline that could boost the franc, which Swiss policy makers call “overvalued” and which is near a seven-week high against the euro on Tuesday. The SNB has already responded to ECB policy; it cut its deposit rate to a record low in January to preempt the effect of QE.

“There is an increasing risk that the ECB may extend its own asset-purchase program in order to tackle low inflation and weak growth,” said Maxime Botteron, an economist at Credit Suisse Group AG in Zurich. “We believe that the SNB will continue to intervene.”

Weak inflation data in the euro area and slowing global demand are adding to pressure on ECB President Mario Draghi to expand the 1.1 trillion-euro ($1.3 trillion) bond-buying program, and more than 80 percent of economists in a separate Bloomberg survey expect such a move. While officials have said repeatedly they are ready to do more if needed, they also indicated it’s too soon to decide. The Governing Council holds its policy meeting on Thursday.

With the Swiss central bank already having accumulated 541.5 billion francs ($565.7 billion) in foreign-currency reserves in its battle to rein in the franc, policy makers may also resort to a bigger charge on sight deposits. SNB President Thomas Jordan told Bloomberg in an interview this month that while the deposit rate is appropriate for now, “it’s possible that it can go lower.”

Economists see the floor at minus 1.25 percent, according to the median of 10 estimates collected between Oct. 9 and Oct. 15.

Thomas Gitzel, senior economist at Liechtenstein’s VP Bank, predicts the rate could “theoretical” fall as low as minus 2 percent, adding that “holding banknotes is even more expensive.”

Slower Growth

Swiss economic growth will slow to about 1 percent this year from 1.9 percent in 2014, according to Jordan. The economy shrank in the first quarter after the SNB dropped its cap on the franc, while there is also pressure from what the IMF has described as “cross border repercussions” of a slowdown in China. Economists see Swiss expansion picking up to 1.2 percent in 2016.

The franc, traditionally perceived as a haven at times of market stress, has weakened against the euro since mid July, defying China-induced market turmoil. It stood at 1.08176 per euro at 2:55 p.m. Zurich time on Tuesday.

Bond data suggest that fixed-income traders may already be pricing in looser Swiss monetary policy for longer. The yield on Switzerland’s 10-year government bond was little changed at minus 0.22 percent -- near its lowest since Jan. 26. The 1.5 percent security due July 2025 was at 116.93 percent of face value.

According to the survey, the inflation rate is seen averaging minus 1.1 percent in 2015, minus 0.3 percent in 2016 and zero the following year. That’s the first time the economists polled predict no price growth through 2017.

“The SNB will try to refrain from further interest-rate cuts,” said Timo Klein, senior economist at IHS Global Insight in Frankfurt. “But if the exchange rate of the Swiss franc with the euro drops back from currently around 1.09 to clearly below 1.05, notably even to parity, such a measure may become unavoidable.”

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