SNB Says Deflation Risks Increased as Franc Ceiling Maintained
Dec. 11 (Bloomberg) — The Swiss National Bank said the risk of deflation has increased as it vowed to defend its cap on the franc to stave off pressure on the currency.
The central bank kept its ceiling of 1.20 per euro and the target range for its benchmark interest rate at zero to 0.25 percent at its quarterly meeting today, as predicted by economists. President Thomas Jordan will hold a press conference at 10 a.m. in Bern.
The possibility of broad-based asset purchases by the European Central Bank has helped push the franc toward the SNB’s upper limit. Officials have held out the prospect of further steps — including a charge on sight deposits — to reinforce the cap it introduced three years ago.
“The SNB remains at the mercy of the ECB,” Janwillem Acket, chief economist at Julius Baer Group Ltd. in Zurich, said before today’s announcement. “The ECB is the key player in determining how the SNB acts next year.”
After refraining from quantitative easing for the euro area last week, ECB President Mario Draghi has pledged to “reassess” the situation in early 2015. Governing Council members expect to consider a proposal that will include purchases of sovereign debt at a Jan. 22 meeting.
Last month, the franc hit a 26-month high versus the euro as investors braced for more easing in the euro area, as well as a referendum that would have impeded SNB policy making by forcing it to boost its gold holdings. Voters rejected the measure on Nov. 30. The franc has gained roughly 2 percent against the euro so far this year.
Bigger Impact
According to a survey by Bloomberg News, all but one of 27 economists forecast the SNB will step up interventions should pressure on the cap intensify. Seventeen see it introducing a negative deposit rate, following the ECB’s June move to charge banks for overnight deposits, according to the poll conducted Dec. 4-8.
With permanent excess liquidity in the Swiss financial system exceeding 300 billion francs ($307 billion), negative rates would have a bigger impact in Switzerland than they did in the euro area, SNB Board Member Fritz Zurbruegg said last month.
“If pressure on the franc becomes unbearable again, the SNB will likely implement a dual response of currency intervention and a negative deposit rate,” said Bernard Yaros, associate economist at Moody’s Analytics. “Both measures come with their risks, but the SNB does not have many other choices to protect the currency cap.”
Oil Drop
A drop globally in the price of crude oil has complicated central bankers’ efforts to stoke inflation.
The SNB’s cap, introduced in September 2011 to shield the economy from deflation and a recession, will be lifted no earlier than 2017, according to 70 percent of the economists surveyed — a prediction made by 56 percent the previous month.
Adding to the SNB’s concerns, residential property prices have risen strongly in recent years, with its loose monetary policy keeping mortgages cheap. Policy makers have repeatedly warned banks to allot credit prudently and were behind the government’s bid to curb risky lending by forcing banks to hold more capital as a buffer.
–With assistance from Paul Verschuur, Jan-Henrik Förster, Jan Schwalbe and Patrick Winters in Zurich and Andre Tartar and Harumi Ichikura in London.
To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net Zoe Schneeweiss, Craig Stirling
