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SNB's cap on franc to stick even as reserves grow: Reuters Poll

09/10/2012 | 12:54pm EDT

ZURICH (Reuters) - The Swiss National Bank will succeed in defending its cap on the franc's value even if Greece or another country leaves the euro zone, a Reuters poll shows, and it won't have to reinforce its defenses as the economy slows.

The poll underlines the credibility that the SNB's cap has achieved a year after it imposed the 1.20 per euro limit to deter investors seeking a safe haven from the euro crisis.

Vowing to shield Switzerland from the risks that currency strength would induce deflation and a recession, the SNB has warned of further measures if the outlook deteriorates.

It announces its next monetary policy decision via a statement at 0330 EDT on Thursday.

Of the 37 economists who participated in the Reuters poll, all expect the central bank to keep its target range for the Swiss franc LIBOR at 0 to 0.25 percent. On average they expect it to keep the benchmark at that ultra-low level until the first quarter of 2014.

The euro zone is Switzerland's top destination for exports, and the economic crisis there prompted fears the Swiss economy would shrink. After the cap was set on September 6, 2011, for months the economy proved astoundingly solid, leading to questions as to how long the SNB would be able to sustain the cap, given its rising holdings of foreign currency as it kept selling francs.

But the economy unexpectedly contracted in the second quarter of 2012, helping to justify the cap.

The central bank will issue fresh forecasts on Thursday. According to the poll, it is expected to cut its growth outlook for 2012 to 1 percent from 1.5 percent.

Of the 20 economists who answered the question, 18 believed the SNB's cap at 1.20 would hold even if Greece or another country abandoned the currency union.

"Giving up the cap would come at considerable cost to the economy and to the SNB itself (in reserve valuation losses), at a stage when uncertainty would be highest and the SNB would have most interest in helping to preserve or restore confidence," BNP Paribas economist Evelyn Herrmann said.

The SNB's forex reserves have ballooned to 71 percent of gross domestic product (GDP). A spike in the currency could inflict losses on the SNB, a publicly held company, threatening its dividend to the government and the cantons.

That happened in 2010, when it suffered a 26.5 billion franc loss on its foreign currency positions, prompting calls for the bank's then chairman to step down.

But the SNB posted a hefty profit for the first half of this year, silencing its critics for now, and can take heart from data last Friday showing the pace of forex reserves growth slowed sharply in August.

This evidence that financial markets are easing pressure on the cap helped push the franc to its weakest in eight months as hedge funds unwound bets against the SNB.


Price pressures are also forecast to stay far below the SNB's 2 percent threshold for stable prices, giving it ample room for keeping policy loose and for interventions.

Inflation for this year is seen at minus 0.6 percent, the poll showed, climbing to 0.3 percent in 2013 and 0.6 percent in 2014.

"In the name of securing price stability and the fragile recovery, the SNB could justify further FX purchases, taking them to 100 percent of GDP and even beyond," said Danielle Haralambous of 4Cast. "The key risk lies in the proportion that is held in euros - currently about 60 percent - which could result in heavy balance sheet losses, as in 2010."

SNB Chairman Thomas Jordan has said the SNB can still carry out its mandate even if it temporarily has negative equity.

Over the past year, trade unions and some exporters have urged the SNB to weaken the franc further, towards 1.40. Even though the economy has slowed, 21 of 25 respondents who answered the question said they did not expect the threshold to change.

"The upward pressure on the Swiss franc will continue until at least mid-2013, so that the cap cannot be moved above 1.20 without creating additional need for the SNB to create Swiss francs," IHS Global Insight economist Timo Klein said.

SNB Chairman Thomas Jordan told the bank's annual meeting in April that the cap cannot be shifted to another level at will.

Swiss officials have said the government has studied additional measures, should the euro collapse. This time round, 15 of 23 economists said the SNB would take no further steps, compared with 11 of 19 three months ago.

Of those who did expect further measures, a charge on sight deposits - the cash commercial banks hold with the central bank - was considered the most likely, followed by forcing commercial banks to charge offshore clients to hold deposits in francs.

(Polling by Aakanksha Bhat and Sarmista Sern; Editing by Ruth Pitchford)

By Catherine Bosley

© Reuters 2012
Stocks mentioned in the article
ChangeLast1st jan.
BNP PARIBAS 0.98% 53.71 Real-time Quote.-11.62%
EURO / SWISS FRANC (EUR/CHF) 0.01% 1.02877 Delayed Quote.-0.83%
SCHWEIZERISCHE NATIONALBANK 0.29% 7020 Delayed Quote.33.97%
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