SNB Seen Off the Hook as Swiss Franc Unperturbed by ECB Action
June 5 (Bloomberg) — The Swiss franc was unchanged against the euro after the European Central Bank cut its deposit rate below zero, taking pressure off the Swiss National Bank to introduce additional measures to defend its currency cap.
The franc traded at 1.2201 against the 18-nation currency at 2:00 p.m. in Zurich. Against the dollar it traded at 89.90 centimes.
The ECB, led by President Mario Draghi, today became the world’s first major central bank to use a negative rate. The Frankfurt-based institution today announced a cut in its deposit rate to minus 0.1 percent from zero. Policy makers also lowered the benchmark rate to 0.15 percent from 0.25 percent.
“Our central case is that they’ll maintain the floor,” said David Tinsley, economist at BNP Paribas in London, adding the SNB would be prepared to “intervene aggressively” to maintain it. “In an adverse scenario, there’s more they can do, for sure.”
Ahead of today’s decision, economists were split on whether the SNB would take action in response to the ECB, with 11 out of 21 in a Bloomberg News survey last month saying it would. Of those, seven said policy makers would sell francs against the euro for the first time since September 2012. The rest said they could charge banks for excess sight deposits.
Charging banks for surplus funds held at the central bank was a suggestion put forward by the International Monetary Fund, which on May 28 said the SNB could consider such a measure to discourage franc demand.
Haven Flows
The SNB set the minimum exchange rate against the euro in September 2011 to protect the Swiss economy from the risk of deflation and a recession after haven flows pushed the franc nearly to parity with the euro. The SNB bought large amounts of euros to defend the cap, leading its foreign currency reserves to swell to 70 percent of annual economic output.
The ECB announcement of a bond-buying program in September 2012 took pressure of the franc and has meant that the SNB hasn’t had to intervene in currency markets to protect the ceiling since then.
“We do not expect the SNB to respond immediately to any action by the ECB,” Dirk Schumacher, a Frankfurt-based economist at Goldman Sachs Group Inc., said in a note to clients yesterday. “Any potential upward pressure on the franc as a consequence of further ECB easing would be first countered with renewed interventions by the SNB should this be needed to protect the 1.20 level.”
The hurdle for the SNB charging banks for their excess deposits is high, “given the very easy domestic financial conditions,” Schumacher said.
Even with the minimum exchange rate, consumer prices are set to stagnate this year. The central bank forecasts economic growth of 2 percent for 2014.
“We’ve stressed that we have an array of assets that can be used to defend the minimum exchange rate,” SNB Governing Board Member Fritz Zurbruegg said in a speech in March. “From an operational point of view, we’re ready to use negative rates as a reinforcement” if so required, he said.
–With assistance from Stefania Spezzati in Milan.
To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Zoe Schneeweiss, Jana Randow
