SNB Reiterates Franc Stance

Switzerland's central bank Thursday stressed its resolve to defend a minimum exchange rate of 1.2 Swiss francs per euro set earlier this month, saying the Alpine nation otherwise risks falling into recession later this year.

The central bank left its key interest rate unchanged at close to zero, as expected by most economists. The SNB held the target range for its benchmark three-month Swiss franc London interbank offered rate at 0.0%-0.25% and will continue to target a three-month Libor rate at zero, a record low in place since Aug 3.
The SNB also trimmed its growth and inflation expectations due to the strong franc, against the backdrop of the global economy crumbling. The central bank now expects inflation of 0.4% this year, from 0.9% previously, minus 0.3% from 1% for next year, and 0.5% from 1.7% for 2013. Swiss economic growth for this year is now seen by the SNB at 1.5%-2%, from around 2% previously.

"Even at a rate of 1.2 francs, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflation risks so require, the SNB will take further measures," including buying unlimited amounts of foreign currencies, the central bank said in a statement during a regularly-scheduled quarterly rate-setting session.

With the SNB's credibility over the franc at stake, the central bank is likely to do whatever it takes—including standing pat on interest rates—to defend the franc cap, ING economist Julien Manceaux said. "In this context, with the European Central Bank likely to take a pause in its rate hiking cycle and today's SNB decision, it becomes very unlikely to see any rate hike in Switzerland any time soon."

The SNB has for months been battling a surge in the franc, which is a major source of worry for Switzerland's exporters. Early last month, the SNB tightened the band for its three-month London interbank offered rate to 0.0% to 0.25%, from 0.0% to 0.75%, and said it will target a rate close to zero. In addition, it flooded the money market with liquidity, pushing the three-month Swiss franc Libor rate to as low as 0.00333% on Sept. 5.

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