Franc Is Still Overvalued, SNB’s Zurbruegg Tells Aargauer
“The Swiss franc is overvalued even at today’s exchange rate against the euro,” Zurbruegg was cited as saying in an interview with Aargauer Zeitung published today. “The minimum exchange rate remains the appropriate instrument for the foreseeable future to ensure price stability.” The Zurich-based SNB confirmed the remarks.
The SNB imposed a ceiling of 1.20 francs to the euro in September 2011 to help exporters and fend off deflation after the currency almost reached parity with the euro. The franc has since weakened as the easing European sovereign-debt crisis sapped demand for havens.
While the franc has depreciated 1.6 percent against the euro this year, it’s still 11 percent stronger than the five- year average and 27 percent above an October 2007 low of 1.6828. Today, it weakened as much as 0.3 percent to 1.22923 versus the euro and was trading at 1.22768 at 8:30 a.m. in Zurich. It was at 91.75 centimes versus the dollar.
To protect the limit, the central bank has piled up record foreign-currency reserves, with holdings rising more than 50 percent to 427 billion francs ($466 billion) since the ceiling was introduced.
“Particularly in the second and third quarter of 2012, we had to intervene heavily to defend the ceiling,” Zurbruegg was cited as saying. “The expansion of the balance sheet is a result of this policy. But that was inevitable in order to combat the massive over-valuation of the Swiss franc.”
Switzerland overtook China as the world’s leader of foreign exchange-rate management in 2012, according to a BGOV Barometer published in December.
“In the short term, Switzerland is by far the biggest manipulator, not just in relation to the size of its own economy, but astonishingly also in absolute terms,” Joseph Gagnon, an adviser to the International Monetary Fund, told Germany’s Boersen-Zeitung in an interview published Feb. 9.
By focusing on purchases of German and French government bonds in its efforts to protect the franc, the SNB has “driven up the euro, increased bond spreads between core and peripheral nations and hampered European integration,” Gagnon, an economist at the Peterson Institute for International Economics, was cited as saying. The European Central Bank should encourage the SNB to also buy peripheral state debt to diversify its portfolio, he said.
The SNB, which has repeatedly said it can’t be called a currency manipulator, holds AAA and AA rated bonds, with internal guidelines requiring it to keep a “substantial part” of its holdings in government bonds to meet “secure investment” standards.
While “extreme risks” in financial markets have disappeared as confidence in the 17-nation euro area returns, “we still have risks in Europe and therefore there are dangers of major exchange-rate movements,” Zurbruegg said. “Therefore, the minimum exchange rate is important.”
Zurbruegg also sees no inflation dangers for Switzerland in the foreseeable future and said the SNB continues to monitor “critically rising” real-estate prices.
He declined to tell the Swiss newspaper whether the SNB had asked the government to implement a so-called anti-cyclical capital buffer for banks to cool the property market, saying the introduction of such a measure would have to be communicated by the Federal Council.
“The gearing ratio at the two big banks nevertheless is quite high,” he said, according to Aargauer Zeitung. “Therefore, we welcome their efforts to improve the capital situation.”
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