Swiss National Bank insists on franc cap at 1.20 euros

BERN - Reuters

The value of the franc must continue to weaken over time, says Swiss central bank.

The Swiss National Bank (SNB) held its cap on the franc at 1.20 per euro yesterday, knocking back speculation it would move to weaken the currency further, although it said it could take further action at any time if risks to the economy mount.

The bank forecast modest growth for next year and only slightly falling prices - leaving analysts divided over whether a rise in the franc cap was likely early in 2012.

“Even at the current rate, the Swiss franc is still high and should continue to weaken over time. The SNB stands ready to take further measures at any time if the economic outlook and the risk of deflation so require,” the SNB said in a statement.

The SNB set the cap on the soaring safe-haven franc on Sept. 6, citing a threat of deflation and of a contracting economy but speculation had mounted in recent weeks that the central bank might shift the cap to weaken the franc further.

The franc jumped after the announcement, trading up 0.8 percent at 1.2277 per euro at 08:51 GMT.
The SNB stuck to the forecast it made in September for prices to slip 0.3 percent next year but pared its inflation forecast for 2011 to 0.2 percent from a previous 0.4 percent and for 2013 to 0.4 percent from a previous 0.5 percent.

The risk of the policy of intervention is that it raises upward pressure on prices and the lack of inflation hence offers the bank room to be more aggressive in fighting the franc’s surge against the euro over the past two years.

“In the foreseeable future, there is no risk of inflation in Switzerland. If foreign demand were to fall off more sharply than expected, downside risks to price stability would emerge,” the SNB said.
The SNB kept its target for the three-month Swiss franc LIBOR at “close to zero” at its policy review, as had been widely expected.