SNB tolerates franc strength, keeps up intervention threat

Bloomberg

Switzerland’s central bank refrained from sounding the alarm about the exchange rate despite the first breach of parity with the euro since 2015, as it warned that the war in Ukraine could hurt economic growth.
Reflecting a restrained reaction to gains in the currency since the Russian invasion of Ukraine, the Swiss National Bank (SNB) stuck with its description of the franc as only “highly valued.” Officials also maintained a threat to intervene if necessary, and they highlighted the risk posed by the conflict.
“Russia’s invasion of Ukraine has led to a strong increase in uncertainty worldwide,” the SNB said in a statement detailing its quarterly decision on Thursday. “The forecasts for the global economy and for Switzerland are therefore subject to very high uncertainty. The risks to growth are considerable and to the downside.”
The SNB’s assessment shows both how uncertainty is now heightened by the war, but also how the buoyancy of its currency is insulating the economy. Elsewhere, surging global energy costs have forced counterparts from the US to the euro zone towards tightening monetary policy.
In contrast with those economies, a comparably benign outlook for prices means the Swiss central bank led by President Thomas Jordan shows no sign for now of envisaging an increase in interest rates that are currently at -0.75, the world’s lowest. Officials kept them at that level on Thursday.
The SNB said that in addition to taking the overall currency situation into account, it also looks at the “inflation rate differential with other countries.” Inflation hit 1.9% in February in Switzerland, while in the euro area it’s more than three times higher.
That comment indicates that policy makers “may allow a certain further appreciation of the franc versus the euro given that it is smooth,” said Karsten Junius, chief economist at Bank
J Safra Sarasin Ltd.
The SNB’s unruffled stance on the exchange rate is reflected in data that suggests only sparse interventions in recent weeks, possibly concentrated on the currency’s March 7 surge to the key level of parity with the euro during a rush for safe havens prompted by the war. The franc since weakened and was trading at 1.02596 per euro at 10:08 am in Zurich on Thursday.
Switzerland’s central bank used to be far more sensitive on the level of the currency, concerned that inflows could strengthen it excessively and strangle the country’s manufacturing exports. For half a decade until its abandonment in early 2015, the SNB imposed a cap on gains in the franc at 1.20 per euro.
The SNB’s forecasts released on Thursday point to one reason for its more relaxed approach at present, even though the outlook is significantly higher than before. Officials see inflation averaging 2.1% this year, and 0.9% in 2023 and 2024, an outlook still well within their comfort zone for the path of consumer prices.
“A worsening in the tight supply of raw materials could lead to a further rise in inflation globally,” the SNB said. “This would also increase the risk of inflation dynamics firming as a result of second-round effects.”
On economic growth, the
SNB predicts about 2.5% this year, less than the 3% in its
December statement.