Swiss National Bank keeps up franc defence

The Swiss central bank pledged to keep up its defense of the franc cap after almost doubling its currency holdings to shield the country from the fallout caused by the euro zone’s crisis.

The Swiss National Bank (SNB) cut its forecasts for inflation and said it will take all necessary measures to keep the “high” franc within the limit of 1.20 per euro. In its quarterly monetary policy assessment Thursday, the Zurich-based central bank also kept the band for its benchmark interest rate at zero percent to 0.25 percent. The Swiss National Bank SNB put the ceiling in place in September 2011 after investors pushed the franc close to parity with the euro and threatened to choke off growth. The franc has weakened 2.6 percent since a European Central Bank pledge to defend the integrity of the euro area in July eased tensions, and just one of 48 economists in a survey sees the franc breaching the cap this year.

The SNB, led by President Thomas Jordan, put the ceiling in place in September 2011 after investors pushed the franc close to parity with the euro and threatened to choke off growth. The central bank’s campaign to defend the cap has led to foreign currency holdings ballooning to more than 400 billion francs, almost three quarters of annual output. It spent 188 billion francs on interventions last year, 10 times the 2011 amount.

“The inflation path is being shifted down, but overall the picture stays the same,” said Alexander Koch, an economist at UniCredit “Since the cap was set in 2011, their stance has been relatively unchanged. They’ve made clear that the ceiling is not for fine-tuning, and I expect the SNB’s stance to continue.”

The franc fell as much as 0.2 percent after the decision and was trading at 1.2357 against the euro at 10:18 a.m. in Zurich. It has weakened 2.6 percent since a European Central Bank pledge to defend the integrity of the euro area in July eased tensions, and just one of 48 economists in a Bloomberg survey sees the franc breaching the cap this year.

Jordan said in a newspaper interview on Feb. 27 that an exit from the cap was still far off given that the euro-zone crisis could flare up again. The central bank confirmed that assessment today. “Downside risks to the Swiss economy remain considerable,” it said in a statement. “There is a risk that tensions in the euro area will increase again.” Shielding Switzerland from recession was one of the reasons the SNB gave for setting the cap on the franc. So far the economy has avoided the downturn that has beset the euro area, its largest trading partner.

Growth is expected to be 1 percent to 1.5 percent this year, unchanged from its December forecast, the SNB said today. It sees prices falling 0.2 percent this year, and rise 0.2 percent in 2014, compared with a December forecast of minus 0.1 percent this year and 0.4 percent next year. In 2015, prices are predicted to increase 0.7 percent. The SNB does not expect a breach of its price stability threshold — positive inflation below 2 percent — in the next three years.

The economy will expand 1.2 percent this year and then accelerate to 1.6 percent in 2014, the median forecast of 25 estimates in the Bloomberg monthly survey published today showed. They expect inflation of 0.2 percent this year and of 0.9 percent in 2014.

While Switzerland’s jobless rate has stayed at a near two- year high since December, at 3.1 percent it’s far below the euro area’s average of 11.9 percent. Indicators — including the purchasing managers’ index for the industrial sector — signal economic expansion for Switzerland in the months ahead.

The lower cost of imported goods due to the franc is weighing on consumer prices. Prices contin- ued their longest slump in at least four decades in February, falling for a 17th month. The SNB termed the risk of deflation acute when it set the ceiling on the franc.

The SNB will stick to its current policy “as long as deflation remains a real threat,” Vontobel Chief Economist Ralf Wiedenmann said. “Remember that both the headline and core inflation rates are negative.”

Switzerland last month introduced a capital buffer for banks to guard against a real- estate bubble. The SNB, which pushed for the measure, will continue to monitor the property market closely, it said today.