Analysis: Other central banks set to act, but Swiss policy cupboard bare

[November 25, 2015]  By Joshua Franklin and Paul Arnold

ZURICH (Reuters) - When the Swiss National Bank stunned markets in January by abandoning its currency cap it had imposed in its franc against the euro, it did so with eyes on the European Central Bank.

The latter was easing policy to such a degree that defending the franc was getting too difficult.

Almost a year later - and capless - not much has changed.

After the decision to end the minimum exchange rate sent Switzerland's currency soaring, the SNB's policies of negative interest rates and foreign currency purchases have helped stabilize the franc <EURCHF=> at a tolerable level for exporters.

But the SNB still describes the currency as "significantly overvalued" and the problem may worsen if the ECB eases policy further next month as is expected.

As in January, when the ECB's looming trillion-euro bond-buying scheme put pressure on the SNB to abandon the 1.20-franc-per-euro cap, Frankfurt's latest foray - probably extending the scope of the scheme - would argue for the SNB to act.

The difference this time is the SNB has few options left.
 

"They are just using the two pillars to weaken the franc at the moment," said Claude Maurer, an economist at Credit Suisse. "The bad thing about today's situation for the SNB is that they don't have many tools left."

The ECB will decide on policy on Dec. 3, one week before the three-member SNB board holds its quarterly policy assessment, although it showed in January it can act at any time.

The SNB declined to comment.

CURRENCY WARS

More ECB easing would be the latest challenge in the SNB's four-year battle to shield the export-reliant economy from the strong franc, which has also been boosted by the euro zone debt crisis and the East-West standoff over Ukraine, .

The most likely SNB response is to increase commitment to current policies, experts said.

It, for example, could ramp up foreign currency purchases, which Credit Suisse economists estimate are now around 400-500 million Swiss francs ($393-492 million) per week.

It could push three-month interbank offered rates, where the target range is between -1.25 and -0.25 percent, further into negative territory to maintain a spread to euro interest rates, thus making the franc less attractive. And it could charge more than 0.75 percent on some sight deposits at the SNB.

"I think the SNB would act if the ECB cuts rates but the room for maneuver is limited," Zuercher Kantonalbank's foreign exchange head Bernd Roth said.

Even-lower rates are an unattractive option as they hit savers as well as lenders with cash at the SNB and could push some banks to start charging retail investors to hold their cash.

Capital controls to limit bank withdrawals or transfers abroad are a theoretical option but economists said they were unlikely given the hit they would have on Switzerland's role as a financial hub.

Some relief, however, could come from the U.S. Federal Reserve, which meets on Dec. 15-16 and is expected to raise rates for the first time in almost a decade. This could strengthen the dollar and ease some pressure on Swiss exports.

There have also been calls from some politicians and labor unions for the SNB to reintroduce the currency cap. It is an open question, however, whether it would have the credibility to do so, given the suddenness with which it was dumped last year.

Just days before ending the cap, then-SNB Vice-Chairman Jean-Pierre Danthine said "we are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy".

($1 = 1.0172 Swiss francs)

(Additional reporting by Angelika Gruber Editing by Jeremy Gaunt)

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