Bloomberg

(Bloomberg) -- Swiss National Bank President Thomas Jordan has some breathing room.

While the central bank’s negative interest rates and threat of currency interventions haven’t pushed the franc back down to its pre-ceiling rate, they have kept it away from a level that analysts say would trigger action from the central bank.

The threshold for another rate cut lies at 1.03 francs per euro, according to the median forecast of economists in Bloomberg’s monthly survey. That’s about 6 percent stronger than its current rate. There’s a little less margin before currency interventions, with the survey putting that at 1.05, though some economists believe the SNB is selling francs already.

“The SNB has more leeway to lower the deposit rate if the franc-euro exchange rate gets uncomfortably close to parity,” said Bernard Yaros of Moody’s Analytics. It will be “reluctant to cut the deposit rate much lower than minus 1.25 percent,” given a rising risk of cash hoarding by consumers, he said.

The franc’s haven status means the SNB has been using verbal threats and aggressive negative rates to prevent what the central bank says is a “significantly overvalued” currency from strengthening. Ever since scrapping the franc cap in early 2015, Jordan has never wavered in his view that the measures are right for Switzerland, and reaffirmed his willingness to sell the franc or cut rates further in an interview on Saturday.

The SNB kept its deposit rate at minus 0.75 percent after its March policy meeting.

While the franc has weakened 0.3 percent since the start of the year, at 1.09 per euro, it is still above the 1.20 level of the currency cap, which the SNB defended between 2011 and early last year. Currency analysts see it at 1.10 against the common currency at the end of the fourth quarter of 2016, falling to 1.15 per euro in 2017, according to forecasts compiled by Bloomberg.

Political Risks

Still, political uncertainty linked to the U.K. referendum on European Union membership and the continent’s lingering refugee crisis may make the franc -- which investors typically flock to at times of uncertainty -- popular again.

“The SNB has not shown a hurry to act recently, but the political risks in Europe in 2016 are unlikely to be euro-supportive, which is why it is too soon to think that the SNB is done with monetary easing,” said Julien Manceaux, a senior economist at ING in Brussels.

While interventions are the SNB’s initial line of defense, the next step would be a further cut to its deposit rate, according to the survey. Jordan said in the interview that while he believes banks could stomach lower rates, further cuts would need a cost-benefit analysis.

The SNB can take its deposit rate -- already at a record low -- to minus 1.25 percent, the poll found. Given the central bank typically moves in 25 basis-point steps, that would imply it has scope for two more rate cuts.

Exemption Limit

Four economists said the SNB could also reduce the exemption threshold, meaning banks would have to pay the charge on a larger portion of their reserves. Currently, that limit is set at 20 times an institutions’ minimum reserves, which according to calculations from Credit Suisse Group AG, means 73 percent of domestic sight deposits are excluded from the deposit rate.

Valentin Bissat, an economist at Mirabaud SCA in Geneva, said that if currency interventions become excessive, the SNB would probably favor lowering the exemption threshold.

“This tool would have a more significant effect on the attractiveness of the Swiss franc than the negative rates with fewer disadvantages,” he said.

--With assistance from Richard Jones and Alessandro Speciale To contact the reporters on this story: Andre Tartar in New York at atartar@bloomberg.net, Catherine Bosley in Zurich at cbosley1@bloomberg.net. To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Joshua Robinson at jrobinson37@bloomberg.net, Zoe Schneeweiss

©2016 Bloomberg L.P.

bloomberg

 Bloomberg