The Swiss National Bank (SNB) has opted to stick with the current interest rate band of between -1.25% and -0.25% at its quarterly monetary policy assessment. The central bank reiterated its willingness to intervene in the currency markets to keep the franc in check, bearing in mind the looming threat of euro volatility should Britain leave the European Union next week.
The central bank will continue to charge domestic banks a negative interest rate of -0.75% to deposit their reserves at the SNB.
This week, the franc-euro exchange rate fell below CHF1.08 for the first time since December as opinion polls in Britain continued to show next Friday’s Brexit vote as too close to call. Throughout the second half of 2015 it traded mostly at around CHF1.09 to CHF1.11.
The looming Brexit vote has created volatility on the markets with investors opting to move their assets to the safe haven franc. Any increase in the franc’s value relative to the euro and other currencies makes life still harder for Switzerland’s beleaguered exporters and the domestic tourism industry.
The SNB has been active in the foreign exchange markets, printing francs to buy euros, and swelling its own foreign currency reserves as a result. The latest monthly figures published earlier this month showed this figure rising from CHF587.6 billion ($609 billion) to a record CHF602.1 billion.
SNB chairman Thomas Jordan said on Thursday that the franc was still significantly over-valued against other currencies. Speaking to journalists, Jordan said he was satisfied that the SNB’s policies were having an effect on exchange rates. But he acknowledged that other influences outside of Switzerland, notably a weak global economy, were having an opposite impact.
“It is the total of these influences in the market that determines the exchange rate,” he said. One of those influences at present is the impending Brexit referendum on June 23. “A Brexit would create turbulence and uncertainty in the markets,” he said. “A Britain that stays in the EU would better contribute to a global economic recovery.”
The SNB expects negative inflation of -0.4% this year, moving into positive territory (+0.3%) in 2017 and +0.9% in 2018.
Too Big To Fail
The central bank also released its annual Financial Stability Report on Thursday that measures the risks posed to the economy from the banking system.
Despite risks remaining from ‘too big to fail’ banks and the mortgage lending industry, the SNB toned down its critical assessments of the last few years. SNB vice-chairman Fritz Zurbrügg said the central bank “acknowledged the progress” made by larger banks to meet new regulatory capital requirements, which will start coming into force in 2019.
But he warned that leverage ratios (the amount of assets set aside to cover losses relative to banks’ total assets) “are still below average for large globally active banks”. This is set to improve from the beginning of July when Credit Suisse and UBS will be expected to increase their leverage ratios to at least 5%.
However, Zurbrügg was less satisfied with the state of mortgage lending, which grew at a “robust pace” last year. Even a modest rise in interest rates would leave many homeowners unable to service their mortgage loan repayments, which could have significant negative consequences for banks, he warned.
He warned that the SNB could at any time recommend that banks increase their countercyclical capital buffers specifically against mortgage loan defaults. This would compel all banks to put aside more reserves to cover potential losses in their mortgage loans business.