SNB Restates Increased Resolve on Franc as Rate Held at Zero
(Bloomberg) — The Swiss National Bank restated its heightened readiness to sell the franc as officials held back again from the more drastic step of cutting borrowing costs into negative territory.
Policymakers led by President Martin Schlegel left their benchmark at zero on Thursday for the third consecutive meeting, as predicted unanimously by economists. Officials kept up their commitment to sell the currency if required to prevent its gains from weighing too much on inflation.
“A rapid and excessive appreciation of the Swiss franc poses a risk to price stability,” Schlegel told reporters in Zurich. “To counter this risk, our willingness to intervene in the foreign exchange market has increased.”
The language chimes with wording it used in a rare verbal intervention this month, provoked by haven flows into the franc after the US attack on Iran. That unsolicited move marked an escalation from its usual pledge to be “willing to be active in the foreign exchange market as necessary.”
The franc erased gains after the announcement to trade 0.3% lower versus the euro at about 0.9110. Safe-haven demand has pushed the franc to an 11-year high since the attacks on Iran began, although traders have been hesitant about further appreciation given the SNB’s threats to intervene to slow its gains. So far this year, it has rallied around 2.2%.
“In times of uncertainty, the Swiss franc is sought after as a safe haven,” Schlegel said. “Swiss franc appreciation reduces imported inflation and dampens economic activity.”
The SNB may have already resorted to franc sales to stem gains that might weigh on prices via lower import costs. That stands out from its more restrained approach in recent years to interventions, which bloat an already outsized balance sheet.
Responding to a question on whether the likelihood of cut below zero had increased, the central bank chief replied that such a move would require a “higher threshold” than a more conventional reduction, referring to past comments.
“Negative interest rates pose a significant challenge for many economic actors,” he said. “Furthermore, the transmission of negative interest rates is not exactly the same. That said, if necessary, we are always prepared to use this instrument again to fulfill our mandate.”
Inflation is barely visible at present but remains in line with the SNB’s forecasts, and growth is holding up so far, making a move to negative rates unwarranted for now.
On the eve of the decision, the US Federal Reserve kept its own rate unchanged as it too took stock of fallout from the Middle East war on inflation risks. Later on Thursday, the European Central Bank is also widely expected to keep policy settings steady.
The Swiss central bank raised its inflation forecast slightly to 0.5% this year because of higher energy costs, up from 0.3%.
Facing feeble price pressures and restricted room for maneuver on policy, the improved outlook may give officials some breathing space.
Next year, consumer-price growth is seen at 0.5%, down from 0.6%. A first estimate for 2028 puts it then at 0.6%.
“In the medium term, inflationary pressure is virtually unchanged,” Schlegel said.
Officials previously stated that risks to borrowing costs were two-sided. Such a stance could open the door toward eventual hikes if the Middle East crisis subsides, but it wasn’t clear from the remarks on Thursday if that’s still the case.
The prospect of tightening will depend heavily on how the consumer-price horizon develops. Schlegel warned before war broke out that negative monthly readings are possible this year.
“We expect unchanged policy rates of the SNB this year even if the ECB should decide to hike rates later this year,” Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich said after the decision. He is among analysts who reckon the central bank has already intervened in the franc.
The central bank predicts growth — which may be hit more directly by the surge of oil and gas — to come in at around 1% this year, about the same as it expected in December. Its first projection for 2027 sees growth of about 1.5%.
“The economic outlook for Switzerland for the coming months is uncertain,” the SNB said. “Growth could be rather subdued, with a certain upturn to be expected in the medium term.”
When asked what comes after “increased willingness” to intervene against the franc’s surge, Schlegel wouldn’t be drawn. “You’ll see,” he said.
–With assistance from Phil Serafino, Alexander Weber, Vassilis Karamanis, Alice Gledhill, Andrew Langley, Jan-Henrik Förster, Harumi Ichikura, Kristian Siedenburg, Joel Rinneby, Naomi Tajitsu and James Regan.
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