By www.CentralBankNews.info Switzerland’s central bank maintained its monetary policy and exchange rate targets, saying the economic risks remain high and the threat of another bout of upward pressure on the Swiss franc has not been averted because international investors are still seeking a safe haven.
The Swiss National Bank (SNB), which imposed a ceiling on the Swiss franc against the euro in September 2011, said it still stands ready to “enforce the minimum exchange rate, if necessary, by buying foreign currency in unlimited quantities, and to take further measures, as required.”
The ceiling was imposed as investors sought refuge from political and economic turmoil in the euro area, driving up the value of the franc. The SNB set a maximum limit of 1.20 francs per euro after it had moved towards parity to the euro and has successfully fought off any rise of the franc above that level. Earlier today it was trading around 1.23 to the euro.
But SNB President Thomas Jordan said the Swiss franc remained high and any rise in its exchange rate would “compromise price stability and would have serious consequences for the Swiss economy.”
“The threat that the Swiss franc could suddenly come under upward pressure again has not been averted. In the current low interest rate environment, therefore, the minimum exchange rate remains the focal instrument for ensuring appropriate monetary conditions,” Jordan added.
A high exchange rate makes Swiss exports less competitive and tends to put downward pressure on inflation, leading to tighter monetary conditions.
“Recent developments suggest that safe-haven considerations continue to play an important role in the demand for Swiss francs. Overall, the value of the Swiss franc remains high and should fall further over the next few quarters,” Jordan added.
In addition to maintaining its target for the exchange rate, the SNB also maintained its target for three-month libor rates at zero to 0.25 percent, and expects that to remain for three years.
Inflation in Switzerland has remained negative for 20 months in a row and consumer prices fell by 0.5 percent in May. Lower oil prices is putting further pressure on prices and the SNB said it was cutting its inflation forecast for this year to minus 0.3 percent. For 2014 the SNB expects an unchanged inflation rate of 0.2 percent and 0.7 percent in 2015.
The Swiss economy bounced back in the first quarter of this year, driven by private consumption and residential investment, with Gross Domestic Product expanding by 0.6 percent from the previous quarter for an annual increase of 1.1 percent.
But Jordan said the risks remain high, mainly stemming from international developments and a weakening of the global economic momentum could not be ruled out as developments in the euro area remain uncertain and tensions can reappear on global financial markets.
The SNB expects growth to weaken in the second quarter but still expects growth of between 1.0 and 1.5 percent for 2013.
Lending by Swiss banks has been growing faster than nominal growth for several years and prices for owner-occupied apartments and single family homes have risen strongly.
Given the low interest rates, which poses the risk that real estate markets will rise further, the SNB proposed activating a countercyclical capital buffer and this will take effect at the end of September. The SNB expects the buffer to enable banks to better weather any sudden economic downturn and also help counter a further rise in mortgage and real estate markets.
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