SNB Jordan Pledges to Defend Cap as Global Risks Rise

Sep 16, 2014 9:58 am ET

(Corrects inflation forecast in ninth paragraph of story published on Sept. 1.)

Sept. 16 (Bloomberg) -- Swiss National Bank President Thomas Jordan pledged to maintain the cap on the appreciating franc amid increasing global economic risks.

“The franc is still highly valued,” Jordan said in an interview with NZZ am Sonntag published yesterday. “Enforcing the minimum exchange rate of 1.20 per euro is absolutely central to ensure adequate monetary conditions in Switzerland” and the SNB stands ready to enforce it by buying unlimited foreign currency, he said.

The Zurich-based central bank set a ceiling of 1.20 per euro on the franc three years ago to ward off deflation and a recession. That limit remains crucial, Jordan said, as an appreciation of the franc would heighten the risk of negative price growth. Coupled with the conflicts in Ukraine and the Middle East, rhetoric by European Central Bank President Mario Draghi suggesting he may be about to embark on quantitative easing lifted the franc to a near 21-month high last week.

“The environment has deteriorated for Switzerland,” he said. “New geopolitical risks have arisen and the international economic data -- particularly in Europe and South America -- was worse than we expected.”

Jordan reiterated that SNB hasn’t intervened to defend the ceiling in two years. In response to a question on whether the SNB might shift the cap on the currency -- for example to 1.25 per euro -- he repeated previous comments that the SNB wasn’t in the business of “fine tuning.”

Consumer Prices

Even so, “we exclude no measure that could be necessary to guarantee adequate monetary conditions,” Jordan said. “Should monetary policy prove to be too restrictive, one would have to think about about what measures would be sensible to fulfill the mandate.”

Today, the franc was little changed against at 1.2068 at 11:57 a.m. in Zurich. Against the dollar it stood at 91.84 centimes.

Speaking at a press conference in June, Jordan termed the introduction of negative interest rates “a possible option.”

The SNB, whose mandate calls for rates of inflation below 2 percent, foresees consumer prices rising 0.1 percent this year, with economic growth of 2 percent. Gross domestic product probably rose 0.5 percent in the second quarter, according to the median economist estimate in a Bloomberg News survey. Data is due to be published tomorrow. The central bank expects price growth to rise to 0.3 next year and 0.9 percent in 2016. The central bank will update those forecasts at its next policy review on Sept. 18.

FX Reserves

According to the Bloomberg Monthly Survey of economists, published before Draghi made his comments in Jackson Hole, Wyoming, on Aug. 22, the SNB will maintain its cap for at least another two years.

The SNB has amassed about 450 billion francs ($490 billion) of foreign-currency reserves, with 16 percent invested in stocks.

In the NZZ am Sonntag interview, Jordan said the SNB is reevaluating its policy of not exercising the voting rights it holds in equity stakes, and would take a stand on questions of “corporate governance.”

The growth trend in the real estate and mortgage-lending market has slowed somewhat, Jordan also said, in part due to the government’s countercyclical capital buffer. Banks should remain cautious as “it is far too early to sound the all clear,” he said.