Switzerland to keep cap on franc until 2016

The Swiss National Bank could keep its cap on the value of the franc until at least mid-2016, a Bloomberg poll has found.

Switzerland’s unique financial and monetary system has kept it in a close relationship with the very different regime within the eurozone. So much so that in the depths of the debt crisis that gripped Europe, Switzerland set a minimum exchange rate to protect the franc from depreciating too far.

Yet it doesn’t seem that the eurozone is recovering quickly enough for the Swiss National Bank (SNB) to risk removing the limit. According to the Bloomberg Monthly Survey of economists, it’s more likely that it will stay in place for another two years.

Over three-quarters of the experts polled said the ceiling of CHF 1.20 per euro would stay in place until at least 2016, with fewer than ten per cent optimistic enough to suggest it could be removed next year.

In fact, 44 per cent did not expect any changes to the cap until 2017.

Interest rates have remained low in the eurozone as the European Central Bank has tried to kickstart sluggish growth within the economy. Recovery in the single currency union faltered in the second quarter of this year, prompting ECB president Mario Draghi to reiterate his commitment to keeping rates low for some time.

That has consequences for Switzerland, which is concerned about the risk of deflation and even recession that could potentially come with a lower franc. At the moment, it doesn’t even appear that the cap is desperately needed – the currency is often seen as a “safe haven” when other currencies are less reliable, and that has kept it trading so strongly that SNB has not had to defend to cap in close to two years.

But the SNB has an elaborate balancing act to handle, since keeping the franc high comes at the risk of harming exports.

Bloomberg recently reported that Swiss companies are facing higher operating costs at a time when their products and services are more expensive for key buyers in emerging markets whose currencies are falling.

The yen and dollar are also causes for concern, since loose monetary policy has kept both currencies weaker in comparison. SNB will have plenty to think about as the eurozone tries to get back on its feet.