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Swiss National Bank's Jordan Says Cap Crucial Tool to Protect Economy - (Bloomberg)

Posted by Chris Advincula on Oct 14, 2013 5:26:00 AM

Swiss National Bank President Thomas Jordan said the central bank’s currency ceiling on the franc remains essential to protect the country’s economy.

“The minimum exchange rate is very important,” Jordan said on Oct. 12 in Washington, where he attended the joint annual meetings of the International Monetary Fund and the World Bank. “It remains a crucial tool of our monetary policy in order to avoid a tightening of monetary conditions in Switzerland.”

The Zurich-based SNB implemented the cap of 1.20 per euro in September 2011 after the franc came close to parity with the bloc’s currency. The franc has depreciated about 2.5 percent versus the euro since the European Central Bank announced an unprecedented bond-buying program in September 2012 to defend the euro. This has allowed the SNB to hold off from intervening in currency markets to protect the limit for more than a year, Jordan said last week.

The “euro-Swiss exchange rate is a little bit above the minimum exchange rate, we still have a very strong currency,” Jordan said. “We have a relatively stable situation with respect to the exchange rate,” he said. “The Swiss franc is highly valued, it should in a way depreciate over time. Even under the situation at the moment with the discussion over the fiscal situation in the U.S., the exchange rate remained above the minimum exchange rate of 1.20 to 1 euro.”

Cap Exit

The franc has fallen 2.1 percent against the euro this year as the fiscal crisis in the 17-nation currency union retreats. It traded at 1.2341 at 6:55 a.m. in Zurich today.

In 2012, the SNB spent 188 billion francs ($206 billion) buying foreign currency to defend the ceiling. The central bank held a total of 432.4 billion francs of foreign currencies at the end of September, equal to about three-quarters of Switzerland’s annual economic output. Without the cap, the economy would have suffered a recession, Swiss policy makers have said, and they have also repeatedly stressed there is no risk of inflation for the foreseeable future.

The SNB will remove the ceiling in the fourth quarter of 2014 at the earliest, according to a Bloomberg News survey of nine economists conducted Oct. 4 to Oct. 9. One economist expects the central bank to exit the cap in that quarter, with four seeing the ceiling to be dropped in 2015 and four in 2016.  



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