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Swiss central bank blames strong currency for weak growth

Switzerland’s central bank has blamed the strong Swiss franc for leaving the country trailing the eurozone’s economic recovery and said it would keep in place an ultra-loose monetary stance that has lasted more than two years.

Thomas Jordan, Swiss National Bank chairman, pointed to the diverging economic performances and said the Swiss franc was still “significantly” overvalued. “The Swiss economy is growing but at a lower rate compared to the eurozone economy and the US economy, and inflation remains subdued,” he said.

The SNB on Thursday left its main policy interest rate unchanged at minus 0.75 per cent, a level set in January 2015. The option of a further interest rate cut remained open, Mr Jordan said.

His comments contrasted with the tone struck last week by the European Central Bank, which took a first small step towards scaling back its ultra-loose policy by saying it would not cut its record-low interest rates any further.

Since the global financial crisis of 2007-2008, investors have seen affluent Switzerland as a haven in times of economic and political instability. But the consequent strength of the franc has hit Switzerland’s export industries, especially sectors such as watchmaking that rely on domestic manufacturing.

In January 2015, the SNB jolted global financial markets by unexpectedly abandoning a formal cap on the franc’s value against the euro. Since that so-called “Frankenschock”, the central bank has battled to prevent the currency’s appreciation by intervening heavily in foreign exchange markets, resulting in its balance sheet expanding to more than SFr700bn ($717bn).

While Switzerland avoided falling into a post-Frankenschock recession and Mr Jordan said on Thursday there were indications the economy was “on the road to recovery”, its growth rate has recently lagged behind noticeably behind the eurozone. In the first three months of 2017, Swiss GDP expanded by 0.3 per cent, compared with 0.6 per cent in the eurozone.

The revival had “not yet taken hold in all areas of the economy” and utilisation of production capacity was “unsatisfactory,” Mr Jordan warned. The SNB expected an inflation rate of just 0.3 per cent this year. It revised down its 2018 inflation forecast down from 0.4 per cent also to 0.3 per cent.

Some pressure has been taken off the SNB since the French presidential election. Investors feared fresh instability in Europe if the far-right National Front candidate Marine Le Pen had won, which would have sent the franc even higher.

The likelihood of further Swiss interest rate cuts also has been reduced by the US Federal Reserve’s steps towards normalising monetary policy, including this week’s quarter percentage point interest rate rise.

The SNB worries, too, that negative interest rates are creating damaging distortions in the economy and financial markets. Its latest financial stability report, also published on Thursday, highlighted risks of domestic banks’ exposure to the Switzerland’s frothy housing market.

Nevertheless, the eurozone’s stronger recovery could lead to divergences in European monetary policy, analysts said.

Because the ECB was still buying assets on a large scale to boost inflation, differences were not yet apparent, said Frederik Ducrozet, economist at Pictet in Geneva. “Importantly though, the divergence between the euro area and the swiss business cycles has been increasing of late, which ultimately is a necessary condition for the monetary cycles to diverge as well,” he said.