Franc strengthens on ECB rate cut

Signs from the ECB headquarters in Frankfurt indicated a rate cut was imminent Keystone

The European Central Bank's (ECB) decision on Thursday to cut interest rates by half a per cent is likely to drive up the value of the Swiss franc even further - causing more headaches for Swiss exporters.

The Swiss National Bank (SNB) is not expected to follow suit as Swiss interest rates are already at historically low levels.

Analysts say that in any case a rate cut would have little effect on the strong Swiss franc – which is bolstered by the currency’s safe haven status.

Currency markets in Switzerland were quick to react to the ECB’s 50 basis points cut to 2.75 per cent. In Thursday’s trading, the franc rose to SFr1.45 against the euro and analysts believe the trend is set to continue.

Safe haven

“The Swiss franc is set to strengthen as interest rate differences narrow,” Nanette Hechler-Fayd’herbe, financial analyst at Credit Suisse First Boston, told swissinfo.

The Swiss franc has a reputation as a safe haven in times of uncertainty, and since the September 11 attacks in the United States, security has been at the forefront of many investors’ minds.

This will prove a decisive factor in keeping Swiss currency rates higher than their competitors.

“Overall, in an environment where the Swiss franc is still the preferred currency against the backdrop of high geo-political risk, the Swiss franc is probably going to strengthen,” Hechler-Fayd’herbe said.

Headaches

Switzerland’s reputation as a safe haven for foreign assets though is undermining the country’s economy and its competitiveness – especially in the export sector.

“It’s tough for any manufacturing and exporting economy when the currency is apparently over-valued and who knows how long the geo-political uncertainty will last which will ensure the Swiss franc is that much stronger than it might otherwise be,” Hilary Cook, director of investment strategy at Barclays in London, told swissinfo.

Swiss exporters have had to work hard to improve their competitiveness. Their efforts paid off as exports held up much better than expected in the third quarter of this year, according to Hechler-Fayd’herbe.

Cheaper imports

One positive consequence of the robust franc is that imports have become cheaper. “This means consumers and producers have access to goods at a more competitive rate and can also adjust their own prices downward accordingly,” Hechler-Fayd’herbe explained.

Nonetheless, Swiss authorities have tried to curb the strength of the franc, cutting rates close to zero but with little effect. Controlling the franc is proving to be a difficult task for the SNB.

“With interest rates very close to zero per cent and the target for the SNB for the three month libor at 0.75 per cent, certainly any further strengthening of the currency may raise questions as to the effectiveness of monetary policy response and the control of the Swiss National Bank may be questioned as far as the currency is concerned,” noted Hechler-Fayd’herbe.

One of the best hopes for a depreciation of the franc, according to Cook, is that the eurozone economy would sufficiently pick up as a result of the ECB’s rate cut, to lure investors back to domestic markets.

“The ECB move was made in the hope of stimulating growth in the eurozone, so in the medium term, in theory the euro should probably be strengthening against other currencies,” Cook said.

The Swiss reputation as a safe haven in these uncertain times – despite weak Swiss economic growth – will however continue to be a major attraction for eurozone investors for the moment.

swissinfo, Samantha Tonkin

Key facts

The ECB cut eurozone interest rates by 50 per cent to 2.75 per cent.
Analysts do not think the SNB will follow suit.
The Swiss franc strengthened against the euro on news of the rate cut.
The franc’s continuing strength undermines Swiss export competitiveness.