The Swiss National Bank (SNB) has kept interest rates on hold but does not rule out repeating currency intervention in future to rein in the strengthening franc.
With the global economic recovery cooling off and the franc again rising against both the euro and the dollar, the central bank said on Thursday that it was poised to act if the twin deflationary threats worsened.
The SNB recently came under heavy criticism after revealing that it had accrued a paper loss of SFr14.3 billion ($14.1 billion) buying up massive amounts of euros between March 2009 and June of this year.
The currency markets intervention managed to slow down the appreciation of the franc against the euro, but ultimately failed to prevent it rising to detrimental levels for Swiss exporters.
But the Swiss Trade Union Federation on Wednesday nevertheless urged the SNB to act urgently to restore the franc to a level of SFr1.45 against the euro.
“The central bank has the mandate to ensure price stability and to consider economic development,” said the federation’s chief economist Daniel Lampart.
“Because the course of the franc has a strong influence on inflation and the economic situation in Switzerland, the central bank has the indirect mandate to fight exchange rate fluctuations.”
The federation also called for the introduction of a currency trading tax to curb speculation that it blamed for increasing volatility.
No snap buying
The franc/euro exchange rate dropped below SFr1.30 earlier this month and has been hovering at around the same level ever since. In addition, the franc is now strengthening at a worrying speed against the dollar, hitting parity briefly on Tuesday and threatening to do so again.
In a statement released on Thursday, the SNB refused to be bullied into a snap buying spree of euros. But the bank also said it was poised to react if recent adverse economic conditions worsened.
“Should they materialise and result in a renewed threat of deflation, the SNB would take the measures necessary to ensure price stability,” the statement read.
The SNB also revised its inflation forecasts significantly downwards, pointing to possible negative inflation at the start of 2011.
The news that the SNB would not be acting immediately to restrain the rise of the franc would hardly please industrialists such as Stadler rail chief Peter Spuhler, who this week explained how precarious the situation is to the Neue Zürcher Zeitung newspaper.
“The high franc course causes a lot of pain for us and the other export-oriented companies,” he said. “It will strangle projects. Therefore we can only hope that the situation at the currency front will relax again.”
Spuhler repeated warnings that Swiss manufacturing production may have to switch abroad if the situation carries on for much longer. This added to trade union fears that job losses could start to accelerate again and warnings from the Swiss tourism sector to expect a disappointing winter.
But Janwillem Acket, chief economist at Julius Bär bank, believes the SNB is right to wait at least for the time being. He argued that a spate of expected negative economic data, the United States mid-term elections and the potential of more wrangling over banking regulations in the coming months could further depress the dollar and euro, rendering SNB intervention futile.
“It is better to keep their powder dry and use it efficiently because wars are not won by spilling ammunition,” he told swissinfo.ch. “The SNB effectively lost the first battle earlier this year with its intervention spree.”
Acket’s sentiments were shared by Bank Sarasin currency specialist Ursina Kubli, but for different reasons. While arguing that previous intervention had some merits for slowing down the appreciation of the franc, Kubli advised against a repeat move under current circumstances.
“If the economy loses momentum at the end of the year then I would think about it, but this is an instrument to be used in emergencies,” she told swissinfo. “It should not be used again unless there are real fears that Switzerland is sinking into recession again.”
The SNB’s radical downward revision of projected inflation rates in the next 12 months also pointed to a delay in making a decision about future intervention.
With inflation now thought to be less of a problem, it would make less sense to raise interest rates from their current range of 0-0.75 per cent with a target level of 0.25 per cent for fear of attracting more investors to the Swiss franc, thus raising its value yet higher.
“This has clearly opened the door to a further strategy of wait and see until the end of the year,” Acket told swissinfo.ch.
Franc on steroids
The Swiss franc is a traditionally sought after safe haven currency during tough economic conditions.
Switzerland’s economic and political stability, conservative nature, stable housing market and well run financial system contribute to the attractiveness of the franc as an escape from more volatile conditions around the world.
The strength of the franc this time around was also boosted by particularly dire economic conditions in both Europe and the United States, that weighed down on the euro and the dollar.
In addition, Switzerland came out of the financial crisis and subsequent recession in relatively good shape compared to many Western economies.
During the peak economic boom year of 2007, one euro cost the Swiss well over SFr1.60. In early 2008, the exchange rate sank below SFr1.50 – thus raising the relative strength of the franc.
Intervention by the SNB has been credited with keeping the rising value of the franc in check throughout 2009, and it was not until December that it cost less than SFr1.50 to buy one euro.
But fears of countries such as Greece defaulting on sovereign debts catapulted the euro into a decline that the SNB was powerless to halt.
At the beginning of September one euro cost just SFr1.284, with the franc tipped to gain even further in value in the coming months.
The franc is not the only currency to face appreciation problems. Japan intervened in the currency markets for the first time in six years this week to keep the Yen under control.
The Chinese government has been repeatedly criticised for buying up massive amounts of dollars to artificially deflate the renminbi.