Swiss maintains rates, intervention threat

ZURICH • President Thomas Jordan isn’t taking any chances with the franc even with the currency within striking distance of what was once the Swiss National Bank’s (SNB) red line.

While the franc had a record drop against the euro last year, the SNB reiterated that it’s “highly valued” and the situation on foreign-exchange (forex) markets is “still fragile”.

Given those concerns, it maintained the threat to intervene if needed and kept interest rates unchanged at a record low.

The franc was at 1.16876 per euro as of 11:03am yesterday in Zurich. That compares to 1.07 a year ago and leaves it just short of the 1.20 level the central bank once enforced its minimum exchange rate.

“The situation in the forex market is still fragile and monetary conditions may change rapidly,” the central bank said in a statement yesterday.

The current policy tools “therefore remain essential”.

The SNB’s decision to stand pat is in contrast to many other central banks.

The US Federal Reserve may raise interest rates again next week and the European Central Bank recently shifted its policy guidance, edging it modestly closer to the exit from stimulus. Norway’s central bank yesterday signalled it will move faster in raising interest rates after changing its inflation target.

Those moves toward policy normalisation come amid a pickup in global growth, which the SNB acknowledged, saying expansion will be “above potential” in the months ahead. It didn’t mention trade wars or other potential downside risks in its assessment.

For the Swiss economy, the bank expects growth of about 2 % in 2018. The economy posted a solid performance in the final quarter of last year, driven by a manufacturing sector that’s benefitted from the weaker currency. But price pressures remain sub par, with inflation forecast to average only 0.6 % this year and 0.9 % in 2019, slightly weaker than previously seen.

Economists surveyed by Bloomberg see no move in the deposit rate deposit until late next year.

“The SNB will wait with a first interest hike until the ECB will deliver, most likely in the second quarter of 2019, in order not to risk even tighter interest rate spreads,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich.

The Swiss central bank also issued a first take on full-year 2020 inflation, expecting it at 1.9 %, effectively in line with its goal. However, consumer-price growth is seen at 2.2 % in the final quarter of 2020, above its price stability threshold. — Bloomberg