SNB says Swiss franc cap remains key policy tool

ZURICH, April 25 Fri Apr 25, 2014 4:00am EDT

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ZURICH, April 25 (Reuters) - The Swiss National Bank's cap on the franc remains its chief monetary policy tool in light of the currency's ongoing strength, the bank's chairman said on Friday.

The SNB capped the franc at 1.20 per euro in September 2011 to help stave off recession and the threat of deflation. It had to intervene heavily to maintain the cap in 2012 as the euro zone crisis flared.

"The European crisis may have become somewhat less virulent, but it has not been overcome," Thomas Jordan said, according to remarks prepared ahead of the central bank's shareholder meeting in Berne.

"With interest rates close to zero and a high Swiss franc, the minimum exchange rate is still the key monetary policy instrument for the SNB," Jordan said.

He added that the franc would weaken in time.

The cap is expected to remain in place through 2014, but in a Reuters poll 11 out of 20 economists forecast it would end in 2015. Some however suggested the central bank would never need to officially exit the currency cap at all.

Jordan said the bank remained ready to enforce the cap by purchasing foreign currency in unlimited quantities and take further measures if necessary.

The SNB expects economic growth of around 2 percent for 2014, and inflation of zero, Jordan said.

Real estate prices and mortgage lending have risen strongly in Switzerland in recent years, a by-product of ultra-low interest rates set by the SNB to lower the appeal of the franc.

The Swiss government said in January it was raising the level of capital that banks must hold against their mortgage book, the so-called counter-cyclical capital buffer, to 2 percent from 1 percent after a previous effort to curb a housing boom failed to restrain the sector enough.

Jordan said momentum on the mortgage and real estate markets showed signs of dampening in 2013, but measures such as the capital buffer had been insufficient to prevent a further build-up of imbalances.

"Based on the data currently available for the first quarter of 2014, the all-clear still cannot be given, in our view," Jordan said. (Reporting by Alice Baghdjian; Editing by John Stonestreet)

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