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(Bloomberg) -- The Swiss National Bank will cut interest rates again in an effort to head off economic damage from the franc’s surge after scrapping its currency cap, according to a survey.

Twenty-six of 28 economists in Bloomberg’s monthly survey forecast that SNB will loosen policy if the economy weakens following its shock decision to give up the franc ceiling in January. Forecasts collected by Bloomberg show a gloomier outlook with growth expected to slow through June of this year. Twenty-two of the respondents see the SNB cutting the rate on sight deposits, currently at minus 0.75 percent, in tandem with a reduction in the benchmark interest rate.

SNB President Thomas Jordan, who has indicated that there’s room for a further rate cut, predicts that Swiss economic growth will lose pace, and the economy may even shrink in one quarter. Economists in the survey share that view, forecasting a contraction in the three months through June.

“Switzerland has to avoid an all-out sharp recession and deflation,” said Janwillem Acket, chief economist at Julius Baer Ltd. in Zurich, who predicts growth of at least 0.3 percent every quarter this year. At the same time, Acket argues that the deposit rate could go as low as minus 5 percent. “Never say never -- we live in times where nothing is impossible.”

SNB officials are scheduled to publish a new economic forecast at their next monetary policy review on March 19.

Currency Basket

The franc soared against the euro after Switzerland’s central bank gave up its three-year-old cap of 1.20 per euro on Jan. 15. That raised the prospect of weakening growth and inflation in the export-oriented economy at risk of suffering a bout of capital inflows due to bond buying by the European Central Bank.

The deposit rate may to drop as low as minus 1.5 percent, according to the median estimate in the survey conducted between Feb. 6 and Feb. 12. As for other measures the SNB could enact, nearly a third of respondents said it could link the franc to a basket of currencies, while a fifth suggested the SNB could reduce the exemption threshold financial institutions are granted on the deposit charge, intensifying the levy.

“Even a slightly weaker euro, if coupled with ECB quantitative easing and a persistent Greek exit risk, could be enough to push the SNB further down,” said Julien Manceaux at ING in Brussels. “As this takes time to achieve, managing short term shocks through foreign exchange interventions is possible.”

Growth Forecast

Gross domestic product will probably rise just 0.1 percent this quarter and fall 0.2 percent next. Growth will resume in the second half of the year, according to the survey. The economy will expand 0.9 percent in 2015 and 1.3 percent next year. The projection for this year is just half the pace forecast by the SNB in December.

The SNB will be “active in the foreign exchange market, should this prove necessary in order to influence monetary conditions,” Jordan said in Brussels on Tuesday, reiterating a view SNB officials have shared repeatedly over the past five weeks.

Sight deposits -- the cash commercial banks hold with the central bank -- have risen since mid January, stoking speculation the SNB has intervened. So did a newspaper report that the central bank has a unofficial corridor for the franc of 1.50 to 1.10 per euro. Even so, central bank data suggest that the SNB may have stopped intervening on Jan. 29 and Jordan has declined to comment on any transactions.

Franc Valuation

The franc, which investors like to buy at times of heightened market stress, has largely traded weaker than 1.046 per euro this month. Jordan on Tuesday termed it “significantly overvalued” at its current level.

Between 2009 and 2011, prior to setting the cap, the SNB pumped tens of billions of francs into markets via interventions in a bid to weaken the Swiss currency, causing its reserves to double. The franc still nearly hit parity with the euro in August 2011.

“The major difference with 2009 and 2010, when the SNB purchased foreign currencies without publicly targeting a precise exchange rate, comes from the valuation of the Swiss franc,” said Maxime Botteron, economist at Credit Suisse Group AG. “Back then the franc was not clearly overvalued against euro as it is now.”

--With assistance from Joshua Robinson in London and Alessandro Speciale in Brussels.

To contact the reporters on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net; Andre Tartar in London at atartar@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

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