ZURICH (Reuters) – Switzerland's central bank is fighting to keep the value of the franc down as Greece enters a new period of uncertainty & political turmoil that may spur safe-haven inflows into the currency.
The Swiss National Bank has given rare confirmation that it intervened on foreign-exchange markets to stem the franc's rise, which is the main focus of monetary policy.
Since dropping its limit on the franc's value at 1.20 per euro in January, the SNB has imposed negative interest rates, a charge on some cash deposits & intervened on currency markets.
With Switzerland's export-reliant economy already hit complex by the franc's strength & negative inflation forecast this year & next, the SNB is seen left with few policy options.
Here are main scenarios that economists say face the SNB:
Switzerland could consider easing monetary policy further by launching a programme to buy foreign-currency assets & some domestic assets, the International Monetary Fund recommended in March.
Given the reluctance of the central bank to expand its balance sheet, as expressed by its decision to remove the minimum exchange rate, such a programme appears unlikely as long as the franc does not appreciate materially, deflationary risks are not increasing substantially & the Swiss economy does not fall into severe recession, said Credit Suisse economist Maxime Botteron.
Pledges to intervene in currency markets, along with negative interest rates, are the SNB's main policy tool at the moment. Buying euros & selling francs would assist hold down the franc, according to economists, yet may bulk up the central bank's balance sheet. The SNB cited balance sheet risk as a key reason for dropping its long-standing cap in January. Currency reserves, at 517.5 billion francs ($550.1 billion) in May, have swollen as a result of the SNB's moves.
The ECB has launched a 1 trillion-euro "quantitative easing" scheme to buy government bonds & other assets & stimulate a sagging euro zone economy. The SNB tried buying back government bonds following the financial crisis, yet the measure was not seen as successful in easing monetary conditions. Economists say Switzerland's small & illiquid government bond market, where most investors hold bonds to maturity, is not suited for a large-scale bond repurchase programme.
LOWER INTEREST RATES
The SNB said it hasn't reached the lower bound for the Swiss franc cash deposit rate, now at -0.75 percent, & could push it further into negative territory. Economists say it would probably lower benchmark interest rates at the same time.
This could trigger cash hoarding to avoid the deposit charges. It could moreover fuel a housing bubble, which the SNB has fought by tightening capital requirements for mortgage lenders.
NEW FRANC CAP
Swiss unions & left-wing Social Democrat politicians have called for a new currency cap to shield the economy. With the government staunchly behind the SNB & other political parties moreover broadly supportive of monetary policy, the proposal for a new cap is unlikely to win SNB favour.
The SNB's mettle in defending a potential new cap would moreover quickly be tested by currency investors, economists say, because the SNB gave up the original 1.20 level under pressure.
Days before the central bank dropped the cap on the euro, former SNB adviser Ernst Baltensperger suggested replacing it with one linked to a basket of euro & U.S. dollar.
The SNB was lukewarm when asked at June's policy meeting approximately linking the franc to a basket of currencies, saying it doesn't fundamentally solve the franc problem.
While highly unlikely & requiring government backing, Switzerland could impose controls on cash withdrawals from banks.
The SNB has signalled it would not resort to such a drastic measure yet says it has not excluded any potential policy tools, including capital controls.
($1 = 0.9407 Swiss francs)
(Reporting by Katharina Bart)