SNB Cease-Fire on Currency Seen Shaky After ECB Action

By Catherine Bosley and Andre Tartar

Photographer: Philipp Schmidli/Bloomberg

The SNB, led by President Thomas Jordan, is forecast to keep its interest rate target... Read More

The Swiss National Bank’s two-year hiatus on currency interventions might be about to end as its exchange rate stays too close to its ceiling, economists say.
With the franc trading within one centime of its 1.20 per euro cap and European Central Bank stimulus intensifying pressure, the SNB will probably need to resume purchases to defend the level, according to 15 of 24 respondents in Bloomberg’s monthly survey of economists. Ten economists said the SNB may even have to resort to charging banks for excess reserves they keep with it, to stave off currency inflows.
The SNB, led by President Thomas Jordan, is forecast to keep its interest rate target range at zero to 0.25 percent and the cap on the
franc unchanged at 1.20 per euro at its meeting on Sept. 18. It has repeatedly said it is prepared to take further measures in addition to its three-year-old cap on the franc to ensure monetary conditions remain adequate.
“Initially we expect the SNB to defend the floor with currency interventions,” said Thomas Bloomfield at 4Cast. “We do not think the SNB will pull the trigger on negative interest rates in September, but rather keep the option available in the event of a broad-based quantitative easing package by the ECB.”

‘Necessary Element’

The franc, which investors favor at times of crisis, has largely been stronger than 1.21 per euro since late August, on expectations of further ECB stimulus. Then on Sept. 10 it fell to its weakest in more than three weeks after the SNB confirmed a negative rate was a “conceivable option,” should supplementary measures be required.
The franc traded at 1.2090 per euro at 12:01 p.m. in Zurich. Against the dollar it stood at 93.36 centimes.
The SNB, headquartered in Bern and Zurich, will also issue new growth and inflation forecasts this week, after the economy unexpectedly stalled last quarter. It currently sees output expanding 2 percent in 2014, with stagnant consumer prices this year and inflation touching 1 percent in 2016.
“The exchange-rate floor remains a necessary element of the Swiss monetary framework, as inflation continues at subdued levels, while the Swiss franc remains overvalued,” said Gero Jung, chief economist at Mirabaud Asset Management in Zurich.
According to the poll, 15 of 24 economists see the cap being maintained until 2017 or later. Just one economist sees the SNB removing it next year. In a separate Bloomberg survey, economists cut their 2014 growth forecast to 1.5 percent from 2 percent, according to the median estimate of 22 economists.

Negative Rates

The SNB will conduct a “cost-benefit analysis” on negative interest rates versus interventions, said Martin Gueth, an economist at LBBW in Stuttgart. “In my view they’ll cut the rate on the sight deposits rather than go for more interventions.”
The International Monetary Fund has said the SNB should consider imposing a charge on sight deposits to counter another bout of franc appreciation. Swiss domestic banks hold about 310 billion francs in such funds with their central bank, most of which is in excess of requirements.
While 14 of 19 respondents say charging banks on sight deposits would weaken the franc, five argue such a fee would achieve little, given that some Swiss money market rates, such the SARON, are already negative.
“Having already reached very low levels, the leeway of the SNB to reduce interest rates is almost exhausted,” said Maxime Botteron, economist at Credit Suisse Group AG. “Past experience shows that negative interest rates are not an effective means to weaken the currency and certainly no substitute for interventions in the foreign-exchange market.”

Unlimited Interventions

Geoff Kendrick, executive director for research at Morgan Stanley in Hong Kong, sees the SNB spending 100 billion francs on interventions, should it choose not to enact a deposit-rate charge. The SNB’s foreign currency reserves amounted to 454 billion francs in August, roughly three-quarters of annual economic output.
Jordan has said the SNB can wage “unlimited” currency interventions and conduct policy even from a position of negative equity. The SNB ran up a record 19 billion-franc book loss in 2010 due to its interventions, resulting in calls for then-President Philipp Hildebrand to resign. For 2013, the SNB scrapped its dividend after the price of gold plummeted.
With Swiss banks facing with tough new regulatory standards and the prospect of giving up banking secrecy for offshore accounts, saddling them with a new charge could prove a non-starter and therefore lead the SNB to prefer interventions, economists including Eric Tannenbaum of Moody’s Analytics said.

Bank Costs

“It is unlikely the SNB will enact policy that would so overtly impact financial institutions,” said Tannenbaum, based in West Chester, Pennsylvania. “Charging on sight deposits will cause banks to push the cost onto customers.”
Karsten Junius, chief economist at Bank J. Safra Sarasin in Zurich, said that a negative rate of only 10 basis points would potentially cost the banking sector 300 million francs a year.
Market participants regard the SNB’s cap as credible and won’t attack it “as long as the economic situation in the euro zone does not worsen significantly,” said Roland Klaeger, economist at Raiffeisen Schweiz. “If interventions became necessary, selling the franc is the preferred measure while negative rates are not likely for Switzerland.”