March 15, 2012 / 10:25 AM / 5 years ago

UPDATE 2-Swiss cbank hikes growth forecast, says franc cap working

5 Min Read

* SNB sees 2012 growth close to 1 pct from 0.5 pct

* Cuts 2012 inflation forecast to -0.6 pct from -0.3 pct

* Rate target maintained at 0 to 0.25 percent

* Says still determined to enforce franc cap at 1.20

* Brief franc tick up after decision

By Catherine Bosley and Emma Thomasson

ZURICH, March 15 (Reuters) - The Swiss National Bank doubled its growth forecast for 2012 on Thursday and said it was determined to enforce its cap on the strong franc at 1.20 per euro because it was helping stabilise the economy.

The central bank kept its interest rate target at 0-0.25 percent as expected and said it would maintain extremely high liquidity on the money markets, though it dropped a reference to targeting a three-month interbank-lending rate "close to zero".

Economic growth this year will be close to 1 percent, up from the 0.5 percent predicted in December, it said. Separately, the Swiss government also increased its 2012 growth forecast, forecasting 0.8 percent from a previous 0.5 percent.

"There are growing indications that Switzerland's economy is stabilising," the SNB said in a statement after its quarterly monetary policy meeting, the first since its chairman, Philipp Hildebrand, quit in January over a currency trading scandal.

Vice Chairman Thomas Jordan has been leading the SNB on an interim basis since then and is widely expected to be appointed to the top job permanently next month.

Despite the doubled growth forecast, the SNB still struck a cautious note, saying "uncertainty remains very high" as it trimmed its inflation forecast across its three-year horizon due to a stronger than expected dampening affect on prices of the 2011 franc surge.

As most economists had predicted , the SNB reiterated it would enforce the cap "with utmost determination" and was prepared to buy foreign currency in unlimited quantities.

"The faster the euro zone economy gets back on its legs, the faster Switzerland will overcome the dent in growth," said VP Bank economist Joerg Zeuner.

"Exporters still wait in vain for a shift in the currency ceiling. Yet if the deflation pressure does not - as expected - abate over the summer months, the cries for an adjustment to the cap should gain force once again."

Calls for Still Weaker Franc

The franc rose to a session high against the euro after the decision, reversing some of the sharp fall of the previous day that had been triggered by market players speculating the SNB might try to weaken the currency further.

The franc climbed to 1.20851 per euro on the EBS trading platform, from around 1.2116 just before the decision, but soon slipped back to hover around 1.21.

The SNB imposed the cap on Sept. 6 after investors seeking a safe haven from the euro zone debt crisis pushed the franc up 20 percent in just a few months, threatening to tip the Swiss economy into deflation and recession.

Left-wing politicians and trade unions have called for the SNB to move the cap closer to 1.30 per euro as exporters and the tourism industry continue to struggle with the strong currency.

But prospects of a shift have receded in recent weeks as data has suggested the economy is unlikely to slip into recession and downwards pressure on consumer and producer prices is easing.

"While the high value of the Swiss franc continues to present enormous challenges to the economy, the minimum exchange rate is having an impact. It has reduced exchange rate volatility and given business leaders a better basis for planning," the SNB said.

"If developments in the international economy are worse than foreseen, or if the Swiss franc does not weaken further, as expected, downside risks for price stability could re-emerge," the SNB said, adding it could take further measures on the franc if the risk of deflation made them necessary.

Consumer and producer price indices have begun to rise on the month, although they are still negative on the year.

"The downgrade to inflation forecasts suggests that the bank has no intention of shifting from its ultra-loose stance anytime soon," said Nikola Stephan of Informa Global Markets.

The SNB also expressed concern about "growing signs" of overheating on the Swiss housing market, that has been stoked by low interest rates since the financial crisis erupted.

"Should these imbalances increase further, this could lead to considerable risks to financial stability," it said.

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