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Central bank battles to curb strengthening franc triggered by investor haven demand The Swiss National Bank is worried by the prospect of interest rates remaining in negative territory for an extended period © Bloomberg Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save Save to myFT Ralph Atkins in Bern JUNE 21, 2018 Print this page0 Switzerland’s central bank has stuck firmly to its ultra-low interest policy as it battles to curb a strengthening of the Swiss franc triggered by political turmoil in Italy and a dovish European Central Bank. Three years ago, the Swiss National Bank slashed its main interest rate to the historic low of minus 0.75 per cent in an emergency move to limit the franc’s appreciation. Despite significant improvements in the affluent alpine state’s economy, the SNB left the rate at that level again on Thursday.  The franc remained “highly valued”, said Thomas Jordan, SNB chairman, with “political uncertainty in Italy and the potential ramifications for Europe” renewing investor demand for safe investments. The global economic outlook was also threatened by “potential international tensions and protectionist tendencies”, he said. Neil Mellor, strategist at BNY Mellon, said the SNB was caught by a Swiss franc “whose performance is reflective of investor risk rather than Swiss fundamentals, at a time when those risks are clearly on the rise”. Peter Rosenstreich at Swissquote said: “The SNB is clearly concerned that its small open alpine economy might feel the full brunt of EU-China-US protectionist fervour.” Since the financial crisis a decade ago, the franc has acted as a haven for investors, its value rising in line with European political tensions. To limit the impact on Swiss exporters, the SNB has sought to deter investors with negative interest rates and has intervened heavily in currency markets, swelling its balance sheet to more than SFr800bn (US $805bn). Upward pressure on the franc waned earlier this year, prompting speculation that the SNB was moving closer towards a more normal monetary policy. Since May, however, the franc has again appreciated significantly against the euro.  Recommended Tail Risk Roger Blitz Swiss franc strength returns as eurozone political risk heats up Last week’s guidance from the ECB saying that official eurozone interest rates were expected to remain at record lows “at least through the summer” of 2019 further contributed to the euro’s weakness. Most analysts believe the SNB will only be able to start lifting Swiss borrowing costs after the ECB has started tightening. Switzerland’s economic growth rate outpaced the eurozone and the US in the first quarter of this year, and unemployment fell to just 2.4 per cent in May. Inflation rates have also returned to positive territory. Rising oil prices resulted in the SNB revising upwards its short-term inflation forecasts on Thursday, but Mr Jordan said a muted eurozone economic outlook had weakened longer term inflationary pressures. The prospect of interest rates remaining in negative territory for an extended period worries the SNB, especially the impact on house prices. In its latest financial stability report, the central bank said “the risk of a price correction in residential investment property has risen substantially”. How did the 2008 financial crisis affect you? Global financial crisis Tell us your story Fritz Zurbrügg, SNB vice-chairman, called for “targeted measures” to curb banks’ mortgage lending, although left open whether that meant self-regulation or official action. Mr Zurbrügg also stepped up warnings about the squeeze on banks’ profits caused by negative interest rates. “As long as pressure on margins persists, incentives for domestically focused banks to increase risk-taking will remain substantial,” he said.

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