The Swiss central bank is counting the cost of its franc policy as President Thomas Jordan’s struggle to keep investors at bay pushes reserves to a record and forces officials to contemplate further measures.
With Europe’s debt crisis intensifying pressure on the Swiss National Bank’s 1.20 per euro ceiling after a breach in April, officials will tomorrow reaffirm their commitment to defend the limit. The central bank’s foreign-currency reserves surged in May, indicating policy makers stepped up euro purchases to stave off attacks spurred by the turmoil.
“The SNB is under intense pressure to appear rock-solid in its determination to defend the limit as any hint of indecision would be seen as an invitation to markets to bet on a further appreciation,” said Bjoern Eberhardt, senior economist at Credit Suisse Group AG (CSGN) in Zurich. “The good news is that they can go on with their interventions for quite a while.”
The prospect of further tests on the franc ceiling has prompted Jordan and government officials to hint at the possibility of other tools such as capital controls. Escalation of that threat is unlikely while the euro-area crisis remains at bay and Switzerland’s economy continues to stave off recession, said economists at UBS AG (UBSN) and Bank Sarasin.
The franc traded at 1.20095 versus the euro at 2:04 p.m. in Zurich. Against the dollar, it was at 95.71 centimes.
Jordan, who took the helm of the central bank in April, will maintain the ceiling of 1.20 francs per euro, according to all 11 economists in a Bloomberg News survey. He will also keep borrowing costs at zero, a separate survey shows.
The SNB will announce its decision at 9:30 a.m. in Bern and also publish its economic projections. Jordan and Vice President Jean-Pierre Danthine will hold a briefing at 10 a.m.
The SNB’s foreign currency holdings rose to a record 303.8 billion francs ($316 billion) in May from 237.6 billion francs in April, with spokesman Walter Meier saying a “large part” of the increase was due to currency purchases.
The central bank, which doesn’t disclose details of its market operations, introduced the ceiling in September after the franc’s surge to near parity with the euro raised deflation threats and eroded export competitiveness. It has since averaged 1.2138 versus the euro, breaching the ceiling just once.
Pressure on the SNB increased after inconclusive elections in Greece last month raised the specter of a euro breakup while Spain’s banking woes deepened. Syngenta AG (SYNN), the world’s largest crop-chemical company based in Basel, Switzerland, said on June 8 it decided to drop some banks and customers in southern Europe in response to the region’s deepening crisis.
Philipp Hildebrand, 48, who stepped down as SNB president in January, told CNBC in an interview broadcast today that the euro region’s survival “has to be the basic assumption” and that “leaders will do what’s necessary to keep the project on the road.”
Jordan told SonntagsZeitung last month that a government- led panel is weighing measures including capital controls should the euro region collapse. The preparations would allow officials to react “fast and flexibly in an emergency situation,” the government said in a statement on June 11 without elaborating.
Still, Caesar Lack, an economist at UBS’ Wealth Management Research in Zurich, said it’s unlikely the SNB will introduce controls on capital inflows, calling it a “psychological threat.”
“Capital controls would only be applied in an emergency,” said Alessandro Bee, an economist at Bank Sarasin in Zurich. “Examples would be a bank run in Spain or Italy or a disorderly exit of Greece. The likelihood of that happening is about 5 percent.”
The SNB’s currency reserves stand at about 55 percent of gross domestic product, according to Royal Bank of Canada strategist Elsa Lignos in London. While Thailand, Malaysia and China have similar levels, holdings amount to up to 130 percent of GDP in Taiwan, Singapore and Hong Kong, Lignos wrote.
Latest available data show the SNB has been reducing its euro exposure over the past two years. Euro holdings accounted for 51 percent of reserves at the end of the first quarter, down from 70 percent in the second quarter of 2010. Reserves of dollars rose to 28 percent from 22 percent in that period.
Christoph Blocher, vice president of the Swiss People’s Party, who had called the SNB’s currency purchases in 2009 and 2010 “senseless speculation,” on June 3 told Der Sonntag newspaper that policy makers should keep in mind that the ceiling won’t be enforceable in the long run. “At one point, it must be up to the foreign-currency market again to determine the exchange rate,” Blocher said.
“There is no limit to the balance sheet of a central bank,” Sylvain Broyer, chief euro-region economist at Natixis in Frankfurt. Still, “they’ll assume a wait-and-see stance.”
While the currency purchases help maintain the ceiling, they’re also increasing the amount of francs available to banks, raising the risk of inflation in the medium and long term. Sight deposits of domestic banks with the SNB jumped to an average 184.5 billion francs last week from 179 billion francs the previous week.
In its March projections, the SNB forecast the economy to expand about 1 percent this year and consumer prices to drop 0.6 percent before climbing 0.3 percent in 2013. Inflation may average 0.6 percent in 2014, it said.
Lack at UBS said the SNB will maintain its inflation language for now.
“They will reiterate that inflation isn’t a risk at the moment to make their point that they can intervene without limits if they want to,” Lack said. “It would be bad communication if they showed in any way that it could be difficult to defend the cap. They will bend over backward to avoid that.”
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