November 16, 2012 / 7:30 AM / in 5 years

SNB says safe-haven flows still justify franc cap

ZURICH, Nov 16 (Reuters) - The Swiss National Bank will continue to enforce the cap it imposed on the franc last year as the currency retains its safe-haven appeal, Chairman Thomas Jordan said on Friday.

“The reasons behind the setting of the minimum exchange rate in September 2011 retain their validity,” Jordan said according to the text of a speech he was due to give in Zurich.

“The financial problems in many countries continue to provide a basis for potential safe-haven capital flows. In addition, at its current rate, the Swiss franc remains high and is weighing on the Swiss economy.”

As investors last year sought refuge from the euro zone debt crisis in the Swiss franc, the SNB capped it at 1.20 to the euro in an effort to stave off recession and deflation.

“This instrument has made a decisive contribution to stabilising the Swiss economy. The export industry is gaining ground again and the deflationary expectations that were threatening to take hold were checked,” Jordan said.

At its September policy meeting, the SNB cut its 2012 growth forecast to 1 percent from 1.5 percent after the economy shrank unexpectedly in the second quarter as the crisis in the euro zone dampened demand for Swiss goods and servicesM

The SNB’s foreign exchange reserves have ballooned to around 70 percent of the country’s annual output, as it has sometimes had to inject large sums to make the cap on the franc stick.

But an easing of market tension in the euro zone since September has allowed the franc to weaken towards 1.21 per euro, stemming the need for the SNB to intervene and allowing it to diversify out of euros in the third quarter.

Jordan noted the SNB tried to reduce its exchange rate risk by diversifying its foreign currency holdings.

“However, the primacy of monetary policy means that our scope for diversification is limited,” he said. (Reporting by Catherine Bosley; Editing by John Stonestreet)

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