SNB can fight strong franc with interventions, rates

Bloomberg

The Swiss National Bank (SNB) has room to cut interest rates further below zero and is willing to increase the size of its balance sheet through currency intervention to prevent an already “significantly overvalued” franc from strengthening, President Thomas Jordan said.
“There’s a willingness to intervene if necessary, and we can use our balance sheet if it makes sense,” Jordan said in an interview with Bloomberg Television in Washington Saturday, where he attended the spring meetings of the International Monetary Fund and the World Bank. The SNB already “went quite far” with its deposit rate “but there is still more room to go,” he said, declining to be more specific.
The SNB has relied on a two-pillar strategy of pledged interventions and negative interest rates for more than a year to keep in check a currency that serves as haven for investors in times of crises. While the franc has weakened 0.4 percent since the start of the year, at 1.09229 per euro, it is still above the 1.20 threshold the SNB defended between 2011 and early last year.
Jordan acknowledged that negative interest rates pose “many many problems” for life insurers and pension funds, an issue not limited to Switzerland. “This is a global environment,” it is an issue “in the euro zone, in the US but also in Japan,” he said.
In Switzerland, “so far, the banking system copes quite well with the negative rates,” he said.
The SNB currently charges banks 0.75 percent interest for sight deposits, with an exemption threshold of 20 times their minimum-reserve requirements.
“For the time being there is no plan to change the exemption threshold,” Jordan said. “This could also be potentially a policy instrument.”
He said he believes banks can cope with yet deeper negative rates, but “obviously, we have to analyze that exactly, and see under what circumstances we have also to make adjustments in that case to the system.”
Under the current threshold, 73 percent of domestic sight deposits are exempt from the deposit charge, according to Credit Suisse Group AG
calculations.

Potential Risks
SNB policy makers have said in recent weeks that any additional policy move would need to be weighed with a view to its potential risk. According to Bloomberg’s most recent survey of economists, the SNB can take its deposit rate to minus 1.25 percent before people begin to hoard cash to circumvent the charge.
Because of the strong franc, Swiss consumer prices declined the most in six decades in 2015 and are set to remain for some time well below what the central bank considers price stability — inflation close to 2 percent.
Economic growth has also suffered, with output increasing just 0.9 percent in 2015. It’s also set to accelerate further this year, with the SNB predicting an increase of 1 percent to 1.5 percent.
“We depend a lot on the global economy,” Jordan said. “The exchange rate is important, of course, but also the global business cycle.”
The IMF cut its 2016 forecast for world growth to 3.2 percent last week from 3.4 percent projected in January, as weak exports and slowing investment dim prospects in the US, a consumption-tax hike saps growth in Japan, and a slump in the price of everything from oil to wheat continues to hobble commodities producers. However, the Washington-based lender sees 2017 growth at nearly 3.5 percent.