Bloomberg News

Swiss Franc’s New Surge May Force SNB to Keep Rates on Hold

June 15, 2011

(Updates franc in seventh paragraph.)

June 15 (Bloomberg) -- The Swiss franc’s surge to a record may force central bank President Philipp Hildebrand to keep borrowing costs near zero for another quarter.

The currency has gained 3.5 percent in the past month, prompting economists at Bank of America/ Merrill Lynch, UBS AG and Julius Baer Group Ltd. to push back their forecast for a rate increase to the September meeting. The Swiss National Bank will keep the benchmark interest rate at 0.25 percent tomorrow, according to all 26 economists in a Bloomberg News survey.

SNB policy makers have been weighing the threat of the currency’s ascent hurting exporters such as watchmaker Swatch Group AG against the risks of near-zero rates fueling price pressures. While central banks from Frankfurt to Stockholm have started tightening monetary reins, Hildebrand has called the franc a “burden” and forecast economic growth to weaken.

“The recent franc gains must have come as a shock to the SNB,” said Alessandro Bee, an economist at Bank Sarasin who had previously projected the SNB to raise the benchmark at tomorrow’s meeting. “It won’t risk raising rates now.”

The SNB, whose attempts to weaken the franc in the 15 months through June 2010 contributed to a $21 billion loss last year, will announce its decision at 9:30 a.m. in Bern, followed by a briefing 30 minutes later. It will also publish its latest inflation forecasts for this year and next.

Franc ‘Burden’

Increasing investor concern that Greece may be forced to restructure its debt pushed the franc to a record 1.2004 versus the euro on June 13. Standard & Poor’s on that day lowered its Greek rating and said there’s a “significantly higher likelihood of one or more defaults” in the euro region.

The Swiss currency, perceived as a haven during times of turmoil, reached an all-time high of 83.27 centimes against the dollar on June 7. It traded at 84.81 centimes versus the dollar at 8:51 a.m. in Zurich and was at 1.2189 against the euro.

The Swiss government on June 14 lowered its 2012 growth forecast, saying that any further franc gains would threaten economic expansion “to a serious degree.”

“The currency appreciation, which already represented a burden on Swiss exports during the last few months,” has worsened over the past weeks, the government in Bern said that day. “A significant downward correction of the franc is not expected in the short run.”

Cie. Financiere Richemont SA, the Swiss maker of Baume & Mercier watches, on May 19 missed full-year profit estimates partly because of the franc. Swatch Chief Executive Officer Nick Hayek has called the currency’s ascent “catastrophic.”

‘Verbal Intervention’

While the SNB last year abandoned attempts to weaken the franc by purchasing foreign currencies, Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said there’s a possibility of “verbal intervention” if the franc breaches 1.20 versus the euro.

“An excessively strong franc has prevented the SNB from raising interest rates and threatens to hammer exports,” he said. “But refraining from making a comment may in fact be the most effective way for the SNB to stem franc gains. The central bank may be best served by keeping markets guessing on whether it will actually enter the market.”

The franc’s ascent has helped shield the economy from imported price pressures. Swiss consumer prices rose 0.3 percent in May from a year ago, calculated using a harmonized European Union method. In the euro region, inflation was at 2.7 percent, breaching the European Central Bank’s 2 percent limit for a sixth month.

Global Tightening

Surging commodity costs have prompted central banks from Sweden to Hungary, China and India to tighten their monetary policy to fight price risks. The ECB on June 9 signaled it’s ready to raise its benchmark interest rate further next month.

“Due to past form, the SNB is widely seen following the ECB,” Ankita Dudani, a currency strategist at Royal Bank of Scotland Group Plc in London, said in an e-mailed note. “The same is not true now as the franc strength on safe-haven flows is keeping inflation very low. So even those who believe in follow thy neighbor are unlikely to look for higher Swiss rates.”

Interest-rate futures show that markets have postponed expectations for the first increase from December to March 2012. Swiss borrowing costs are the lowest among major global economies after the U.S. and Japan.

So far, the Swiss economy is showing few signs of slowdown. Manufacturing growth accelerated in May, leading economic indicators held at the highest in almost five years and unemployment dropped to 3 percent, when adjusted for seasonal swings. That’s the lowest in more than two years.

Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt, still expects SNB policy makers to raise borrowing costs at their September meeting, saying the current rate level is “too low for the Swiss economy.”

“Given the economy’s resilience, there are lots of reasons for the SNB to raise rates,” said Alexander Koch, an economist at UniCredit Group in Munich. “But given the strong franc and the low inflation, there are even more reasons not to do it.”

--With assistance from Harumi Ichikura in London. Editors: Simone Meier, Paul Verschuur

To contact the reporter on this story: Klaus Wille in Zurich at

To contact the editor responsible for this story: Craig Stirling at

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