Bloomberg News

SNB Keeps Franc Ceiling at 1.20 Versus Euro

March 15, 2012

Swiss National Bank interim Chairman Thomas Jordan. Photographer: Gianluca Colla/Bloomberg

Swiss National Bank interim Chairman Thomas Jordan. Photographer: Gianluca Colla/Bloomberg

The Swiss central bank pledged to keep defending its six-month old franc ceiling and said deflation still threatens the economy even as growth shows signs of stabilizing.

The Swiss National Bank, led by interim Chairman Thomas Jordan, maintained the franc ceiling at 1.20 francs per euro, as forecast by all 14 economists in a Bloomberg News survey. The Zurich-based central bank said in an e-mailed statement today that it also kept its benchmark interest rate at zero.

Jordan, 49, has gained some room to keep the limit unchanged as the economy regains some strength. Swiss gross domestic product unexpectedly rose in the fourth quarter, investor confidence increased in March and the government today raised its 2012 growth forecast, calling the euro-region’s debt crisis a “considerable” risk. The SNB reiterated it will defend the cap with the “utmost determination” if needed.

“The SNB stresses risks,” said Caesar Lack, an economist at UBS AG’s Wealth Management Research in Zurich, who used to work at the SNB. “They try not to appear too optimistic in order not to jeopardize the franc ceiling. We think they will keep the cap on hold for the foreseeable future.”

The franc strengthened against the euro after the decision, trading at 1.2109 at 10:56 a.m. in Zurich, little changed on the day. Versus the dollar, it was at 92.72 centimes.

Franc Impact

The SNB lowered its inflation projections throughout the entire forecast horizon. It estimates that consumer prices will fall 0.6 percent this year, before inflation returns in 2013 with a rate of 0.3 percent, accelerating to 0.6 percent in 2014. At the December assessment, it forecast prices to drop 0.3 percent this year and increase 0.4 percent next.

“In the short term, inflation will move further into negative territory,” the central bank said. “Last summer’s appreciation of the franc had a stronger damping effect on prices than anticipated. In the longer term, inflation will be lowered by the worsening growth outlook for the euro area and the continuing high valuation of the franc.”

The franc, which is considered a haven in times of turmoil, gained as much as 37 percent against the euro in the 12 months before the cap was introduced on Sept. 6, undermining exports and increasing the threat of deflation. It has since traded between 1.20 and 1.25 per euro.

‘Moderate’ Pace

Jordan, who was appointed interim chairman after Philipp Hildebrand quit in January, said at an event on Feb. 28 that “there will be a time when we return to a normal situation,” and described the franc as still “overvalued.”

“If developments in the international economy are worse than foreseen, or if the franc does not weaken further, as expected, downside risks for price stability could re-emerge,” the SNB said, adding that it “stands ready to take further measures at any time if the economic outlook and the risk of deflation so require.”

In the U.S., the world’s largest economy, the Federal Reserve of New York may say its general economic index fell to 17.5 this month from 19.5 in February, according to a Bloomberg survey. The Reserve Bank of India today is forecast to keep its interest rates unchanged and the European Central Bank, which kept its benchmark rate at 1 percent on March 8, said it sees “signs of stabilization” in the euro-region economy.

‘Considerable Risks’

The Swiss economy may grow at a “moderate” pace close to 1 percent this year, the SNB said today. It previously forecast an expansion of about 0.5 percent in 2012. On the Swiss mortgage and real-estate market for residential property, there are “growing signs of imbalances,” which could lead to “considerable risks to financial stability,” it said.

“While the high value of the franc continues to present enormous challenges to the economy, the minimum exchange rate is having an impact,” the SNB said. “It has reduced exchange-rate volatility and given business leaders a better basis for planning. There are growing indications that Switzerland’s economy is stabilizing.”

Euro-area finance ministers on March 13 signed off on a second Greek bailout, clearing the way for the first payment from the 130 billion-euro ($171 billion) package to be made this month. The agreement caps months of grueling negotiations that sparked concerns that the nation may default, eroding the value of the euro against other currencies.

The SNB spent 17.8 billion francs ($19.4 billion) in 2011 to stem what it called the currency’s “massive overvaluation.” That compares with 144 billion francs it used in the previous year to buy currencies, a policy that sparked a record loss. The Swiss government is set to confirm next month whether it will appoint Jordan as chairman.

Deflation Risks

Even after the introduction of the cap, the Swiss currency is still about 6 percent stronger against the euro than it was a year ago, highlighting the risk of deflation as costs of imported goods drop. The price of foreign goods fell 3.4 percent in February from a year ago.

The Swiss government said today it expects the economy will expand 0.8 percent this year instead of a previously projected 0.5 percent. It forecast the economy will grow 1.8 percent in 2013. The slowdown of exports is “less marked than feared some months ago” and economic growth should gradually strengthen this year with no risk of a recession, it said.

The SNB’s growth forecast for 2012 “is certainly in the higher range of what seems achievable,” said Julien Manceaux, an economist at ING Group in Brussels. “All in all, any rate change should not be expected before mid-2013, and given both the European situation and the weakened SNB Governing Board, no change is to be expected in the current floor policy.”

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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