Swiss National Bank Frustrated the Franc Isn’t Weaker

September 13, 2012

In August 2011, Swiss monetary authorities cut the 3-month Libor target to zero to 0.25% with a point objective of 0.0%.  This imposition of ZIRP (zero interest rate policy) was followed one month later by a euro floor of CHF 1.2000 that the central bank has enforced with currency intervention and other steps.  These actions were not undertaken at a scheduled policy review, underscoring the crisis nature of the move. 

This week’s quarterly review of Swiss conditions and monetary policy, like those last December, March and June, served as an opportunity to reiterate more forcefully than ever the continuing commitment to the full-court press against franc appreciation.

The Swiss National Bank (SNB) is leaving the minimum exchange rate unchanged at CHF 1.20 per euro, and will continue to enforce it with the utmost determination. It remains committed to buying foreign currency in unlimited quantities for this purpose. The Swiss franc is still high and is weighing on the Swiss economy. For this reason, the SNB will not permit an appreciation of the Swiss franc, given the serious impact this would have on both prices and economic performance in Switzerland. It is leaving the target range for the three-month Libor rate unchanged at 0.0–0.25%. If necessary, it stands ready to take further measures at any time.

The SNB statement goes on to observe “a more pronounced underutilization of production underutilization of production capacity in Switzerland and to blame such in part on “the fact that a depreciation of the Swiss franc has failed to materialize as expected.”  In forecasting future growth and inflation, officials assume that the franc in time will settle back further as hoped.  Many analysts anticipated a shift in the euro’s imposed franc cross rate to 1.2200 at this juncture.  This didn’t happen, but the final though of the above quote is a veiled threat that the target franc rate might be changed in the future.

Because the franc has hovered near 1.2000 per euro instead and due to a more unfavorable international environment since the last policy review, forecast of Swiss growth and inflation were each revised downward.  GDP is now expected to climb just 1.0% in 2012, a revision from 1.5% previously, and “downside risks will stay high in the near term.”  By custom, these reviews lay out a conditional inflation forecast path assuming current policy (i.e., Libor of 0%.)  The predicted inflation path covers from the current 3Q12 quarter through 2Q15.  Not even at the outermost point does it rise even as high as 1.0%, and the estimate for every quarter except 2Q13 has been nudged down by 0.1 of a percentage point. 

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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