Franc cap remains “valid” policy

Jordan denied that central banks worldwide were in a currency war Ex-press

The president of the Swiss National Bank (SNB) has reaffirmed the central bank’s determination to keep the Swiss franc cap in place for as long as needed. Thomas Jordan said he expected the currency to continue easing against the euro in 2013.

The franc may have weakened since the start of the year against the euro, but keeping a lid on the franc at 1.20 per euro remains the appropriate monetary policy instrument to maintain price stability, Jordan told reporters in Geneva on Tuesday.

“The motives for the introduction of the cap are still valid,” he said. “The franc remains a very strong overvalued currency, although we expect it to continue to fall and weaken. The risk of an extreme change in the exchange rate remains as long as budgetary problems in the euro zone are not resolved.”

The SNB would maintain the peg “with the utmost determination” and, if necessary, take additional measures to achieve its aims, he added.

In September 2011, the SNB fixed a minimum exchange rate of SFr1.20 to the euro to check the franc’s strong gains versus the euro zone currency when it reached almost parity and to prevent Switzerland sliding into a cycle of deflation and recession.

The central bank has intervened heavily to defend the 1.20 limit, building up foreign currency reserves of over SFr427 billion in December and making it the world’s biggest foreign exchange-rate manager in 2012, overtaking China. But it has done less since September as an easing of the euro zone crisis took the heat off the franc.

Not out of the woods

Looking at the global economy, Jordan said he sensed greater economic optimism – but the end of the crisis was still far off.

“Most participants at the World Economic Forum in Davos were cautiously optimistic,” he said. “Since summer, stock exchanges are up and at their highest levels since 2008. But it’s too early to be euphoric. On the whole, growth remains weak and fragile. There is no end to the crisis in sight and a return to normal conditions will be long and difficult.”

Fortunately, the Swiss economy, helped by its strong internal market and labour market flexibility, had managed to absorb the shock better and avoid recession, the SNB chief said.

Jordan said the economy had continued to grow in the fourth quarter, although slower than in the previous three months. He predicted growth of one per cent for 2012 and 1-1.5 per cent in 2013.

“The upturn in Switzerland remains moderate. Production capacity is underutilised due to weak growth. Unemployment is expected to continue to rise and there remains a high risk of economic deterioration,” he concluded.