Thursday, December 12, 2013

Switzerland keeps franc cap, warns of housing imbalances

   Switzerland's central bank maintained its upper limit on the Swiss franc's exchange rate against the euro and its interest rate target, as widely expected, and warned of a "considerable" danger of a further build-up of imbalances in the housing market.
     The Swiss National Bank (SNB), which imposed a 1.20 cap on the franc to the euro in September 2011, also said the Swiss economy developed favorably in the third quarter but growth could weaken in the fourth quarter.
    For this year, the SNB forecast growth of 1.5-2.0 percent, the same as in September, and for 2014 growth of around 2.0 percent.
    "However, given the vulnerable economic situation abroad, downside risks still prevail for Switzerland," the bank said.
    The SNB's forecast for inflation was revised down slightly, partly due to unexpectedly low rates in October and November and partly due to lower inflation in the euro area and a fall in oil prices.

    For 2013 the SNB forecast an unchanged inflation rate of minus 0.2 percent and for both 2014 and 2015 the forecast was cut by 0.1 percentage point to 0.2 percent and 0.6 percent, respectively.
    "Consequently, no inflation risk can be identified for Switzerland in the foreseeable future," the central bank said. 
    Switzerland's inflation rate rose to 0.10 perent in November, the first rise in consumer prices since September 2011, breaking the continuous cycle of deflation.
    The country's Gross Domestic Product expanded by 0.5 percent in the third quarter from the second quarter for annual growth of 1.9 percent, down from 2.5 percent
    The Swiss franc was trading at 1.22 to the euro today but the SNB said "the Swiss franc is still high," and repeated that it was ready to enforce the exchange rate by "buying foreign currency in unlimited quantities, and to take further measures as required."
    "With the three-month Libor close to zero, the minimum exchange rate continues to be the right tool to avoid an undesirable tightening of monetary conditions in the event of renewed upward pressure on the Swiss franc," the SNB said.
    The limit on the franc was imposed during the depths of the euro area sovereign debt crises when investors sought safe-haven in Swiss francs, driving up its value and making Swiss exports expensive.
    The SNB's target range for the three-month Libor remains at 0.0-0.25 percent.
    Attracted by Switzerland's political stability and low mortgage rates, the Swiss housing market has been going through a boom and the SNB has frequently warned of overheating.
   Earlier this year the government imposed a countercyclical capital buffer at the SNB's request, under which banks have to hold a minimum 1.0 percent extra capital on their mortgage-related assets.
    Warning of the danger of a further increase in housing prices, the SNB said that it "continues to monitor the situation very closely, and regularly assesses whether the countercyclical buffer should be adjusted."


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