Franc retains strength despite rate cut

The strong franc has drawn howls of protest from exporters Keystone Archive

Currency traders continued to buy francs on Friday, despite the Swiss National Bank's interest rate cut aimed at driving down the value of the currency.

Economists were predicting that the central bank may soon have to cut rates again, after Thursday’s half percentage-point reduction in the key short-term interest rate failed to deter investors from buying francs.

The bank cut its key Libor rate to 0.75 per cent – 1.75 per cent in the fourth rate cut since the September 11 attacks.

In a statement on Thursday, the bank said the high value of the franc was threatening economic growth. It added that it was watching the currency closely and that it would step in again should the franc continue to rise against other key currencies.

However, economists say the bank does not have much room for manoeuvre since rates are already so low. They say inflation is not a danger at present – since economic growth is still sluggish – but could be a problem later if rates are cut too far.

Safe haven

The SNB’s ability to influence the value of the franc is seen as limited, both because the currency is seen as a safe haven in difficult times and because investors are increasingly jittery about the dollar and the euro.

“In the current situation, you can’t expect the Swiss franc to weaken just because interest rates were cut by half a percentage point,” said Joachim Schuetz, an economist at Credit Suisse First Boston.

The US currency has fallen sharply in recent weeks amid uncertainty over the future prospects for the American economy, as well as growing confusion about whether the Bush administration intends to maintain a strong dollar.

The euro is also causing concern amid threats of labour unrest in Germany.

Swiss exporters have been complaining about the strength of the franc, which makes their products more expensive on the international market.

swissinfo with agencies