SNB Seen Keeping Cap for Longer as ECB Fights Weak Inflation
(Updates franc in sixth paragraph. Click here for the full survey. See ECFC CH for Swiss economic forecasts.)
July 16 (Bloomberg) — The Swiss National Bank will keep its franc cap into 2016 as euro-area policy makers’ attempts to fuel inflation maintain pressure on the Swiss currency, economists say.
Just 14 percent of the 22 economists polled in the Bloomberg Monthly Survey predict the SNB will lift the minimum exchange rate by the end of 2015. That compares with 27 percent last month and 53 percent in May. A record 46 percent say the cap will be lifted in 2016, up from 36 percent in June. Twenty three percent bet on a suspension in 2017 or later.
“The SNB is likely to continue to enforce the minimum exchange rate with utmost determination as long as needed,” said Gero Jung, chief economist at Mirabaud Asset Management in Zurich. “The latest inflation data show the total absence of inflationary pressures in Switzerland, and the minimum exchange rate is the right tool to avoid a tightening of monetary conditions.”
The SNB capped the franc at 1.20 per euro nearly three years ago, citing the risk of deflation and a recession as investors bought the franc as a refuge amid the euro area’s debt crisis. With consumer-price growth set to stagnate this year, President Thomas Jordan said at the central bank’s most recent policy review that it wasn’t yet time for an exit and that the cap remained the policy tool for the “foreseeable future.”
Low Inflation
Economists expect a 2014 inflation rate of 0.1 percent, accelerating to 0.6 percent in 2015 and 1.2 percent in 2016, according to the median estimate in the survey. They predict a growth rate of 2 percent this year, with 2.2 percent expected for 2015 and 2.1 percent in 2016.
The franc appreciated 0.5 percent against the euro last month, according to data compiled by Bloomberg. It traded at 1.2156 against the bloc’s currency at 12:28 p.m. in Zurich.
Among the economists who have postponed the point at which they think the SNB may abandon the cap are Alexis Bill-Koerber of BAK Basel and Eric Tannenbaum at Moody’s Analytics.
European Central Bank President Draghi’s bid to rekindle growth and inflation in the 18-country bloc with the help of a negative deposit rate and a targeted lending program could create demand for the franc and extend the need for the SNB’s cap, Tannenbaum said.
“The policy that was enacted more than two years ago will now likely continue well into 2016 thanks to the ECB’s stimulus campaign,” he said.
Quota System
In addition, SNB officials may have to address growth risks stemming from the government’s new quotas on immigration for citizens of European Union countries. Some 67 percent of the economists surveyed say the change would hurt growth, while 28 percent say its effect will be negligible.
The new system, which the government intends to have in force from 2017, is a response to a national referendum in February in favor of measures to stop mass immigration. The change must still be passed by parliament and could face another country-wide vote.
A fifth of Switzerland’s 8 million inhabitants aren’t citizens. The majority of newcomers are from EU states such as Italy and Germany, who in the last decade have been allowed to take up jobs in Switzerland without special permission.
Cantonal Quotas
The requirement is for a national maximum number of new immigrants, to be set every year. Depending on demand, cantons will be assigned an annual quota, determined by the state of the economy and unemployment. The quotas would include cross-border commuters and stays of less than 12 months.
“The robust growth rates in Switzerland are partly generated by liberal immigration rules,” said Thomas Gitzel, senior economist at VP Bank in Liechtenstein. “There will be a negative impact on potential growth.”
The median estimate of those economists who gave quantitative forecasts is for a 0.19 percentage point curb on annual growth rates in the decade following the vote’s implementation due to lower immigration.
According to the SNB, immigration has helped propel economic output almost 5 percent above its pre-crisis level.
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: Joshua Robinson at jrobinson37@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net Zoe Schneeweiss, Jana Randow
