UPDATE 2-SNB says ready to act as needed in wake of ECB easing

Thu Jun 19, 2014 6:20am EDT

Related Topics

* SNB keeps cap, target rate for LIBOR on hold

* Sees substantial risks to global economic recovery

* Says closely monitoring impact of ECB rate cut

* Trims inflation outlook for 2015, 2016 (Adds details, quotes from news conference)

By Alice Baghdjian

BERNE, June 19 (Reuters) - The Swiss National Bank on Thursday stuck to its almost three-year old policy of capping the franc at 1.20 per euro and said it stood ready to take further steps if necessary in the wake of the recent easing by the European Central Bank.

The SNB capped the franc at 1.20 per euro in September 2011 after investors fleeing the debt crisis snapped up the safe-haven currency, sending it to record highs, hurting the country's exporters and threatening to snuff out inflation.

It has not had to sell francs to defend the cap in more than a year. But the ECB's decision this month to cut its deposit rate to below zero could make Switzerland a relatively more attractive destination for investment again, meaning the SNB has to keep rates lower for longer to keep a lid on the franc.

"We are closely monitoring the impact of the recent interest rate reductions in the euro area on Switzerland. Should there be a need for action, the SNB will take the necessary measures," Jordan said in Berne.

ING economists said further interventions by the SNB on the foreign exchange markets before the end of the year could not be ruled out, but it noted the current size of the central bank's balance sheet would limit the extent of any operations.

"If the pressure was to be too high, the SNB would have to turn to other kinds of instruments," ING said.

Jordan told a news conference he did not rule out the use of negative interest rates to defend the minimum exchange rate. He said the cap remained the right tool for the forseeable future.

The SNB also warned of the danger of greater volatility on financial and foreign exchange markets, referring to stark differences in when central banks around the world may exit their currently expansionary monetary policies.

While the ECB has cut rates to record lows and decided to pump money into the euro zone economy, the U.S. Federal Reserve has hinted at a slightly more aggressive pace of interest rate hikes starting next year.

Evidence is also mounting that the Bank of England will shift towards a rate rise before the end of the year.

CAUTIOUS TONE

The Swiss economy sprang back from a weak fourth quarter at the start of this year, but its performance fell short of expectations, with tentative signs of a recovery in Europe having yet to feed through to higher demand for Swiss exports.

This prompted the Swiss government to scale back its forecasts for economic growth for this year and next on Tuesday, saying slow growth in Switzerland's biggest trading partner, the European Union, could weigh on demand for goods.

In its statement, the SNB cautioned there were still substantial risks attached to the economic recovery which in turn could hamper Switzerland's export-orientated economy, but it kept its growth forecast for the year at 2.0 percent.

"What is surprising is how cautious the SNB is in its economic outlook," said J. Safra Sarasin economist Alessandro Bee.

"They emphasize the risks, for instance structural issues as well as warning of possible volatility because of different monetary policy cycles."

The SNB stuck to a target band for the Swiss franc LIBOR of 0 to 0.25 percent, as all economists in a Reuters poll had forecast.

It tweaked up its inflation forecast for 2014 to 0.1 percent from a previous 0.0 percent, but trimmed its inflation forecasts for 2015 and 2016 to 0.3 percent and 0.9 percent respectively.

"We still really see no inflationary pressure in Switzerland. That means the SNB can keep monetary policy very accommodative," said Maxime Botteron, an economist at Credit Suisse.

A majority of economists polled by Reuters expect the central bank to keep the minimum exchange rate in place until at least 2016 or later.

Despite a slight slowdown in the pace of mortgage lending growth, the SNB said there was no evidence of any sustainable easing in the mortgage and real estate markets and it would continue to monitor the situation closely.

From the end of this month, banks will have to hold 2 percent extra capital against risk-weighted assets in their mortgage portfolio.

SNB Vice Chairman Jean-Pierre Danthine said the central bank was preparing additional measures that could be implemented if needed. (Reporting by Alice Baghdjian, Katharina Bart, Silke Koltrowitz and Joshua Franklin. Writing by Caroline Copley. Editing by Hugh Lawson)

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