SNB To Defend Floor, Measure Easing Economic Pressure

[Benjamin]

Swiss National Bank Vice-President Jean-Pierre Danthine reiterated Thursday that while it will enforce its floor of 1.20 Swiss francs per euro with utmost determination, the measure is easing the deflationary and recessionary risks facing the country.

"The minimum exchange rate has decreased the deflationary and recessionary risks associated with a massively overvalued currency," Danthine said Thursday in a text prepared for delivery at a banking conference.

Danthine, whose views echo those of SNB President Thomas Jordan, said the EUR/CHF floor of 1.20 will remain the focal point of Swiss monetary policy going forward.

"In the current global context, Switzerland's economic situation doesn't justify any strengthening of monetary conditions and this should remain the case for the foreseeable future," he said.

The appreciation of the franc--which soared to near parity with the euro shortly before the SNB imposed its euro/franc floor in September--"is not a quantative easing measure," he said.

The SNB pared its key interest rate to near zero, and boosted money market liquidity in August last year, before imposing its EUR/CHF floor, in an attempt to choke off investor buying of the franc, which threatened to make Swiss exports uncompetitive in key European markets.

"The aim of the minimum rate is to avert the worst possible developments in a zero interest-rate environment, and is not a response to each and every challenge with which the Swiss economy is faced, nor can it be implemented at any desired level," he said.

While there is no risk of Swiss inflation building in the forseeable future, Danthine said the low Swiss interest-rate environment has led to "vibrant" credit and property markets and there are "concerns about the build-up of imbalances."

These Swiss real estate market concerns must however be solved by other measures, such as a 'countercyclical capital buffer' which would oblige lending banks to tighten mortgage lending requirements.

Unlike Jordan's interview in a Swiss newspaper last weekend, Danthine made no reference to the possible introduction of capital controls should the situation in the euro zone deteriorate and put extra pressure on the EUR/CHF floor.

"An appreciation of the franc would again expose the Swiss economy to considerable risks and, once more, endanger both price stability and the economic situation," he said.

"Given this state of affairs, the SNB will continue to enforce the minimum exchange rate with utmost determination and, should the economic outlook and the threat of deflation require, is prepared to take further measures at any time," Danthine said.

wsj