March 26, 2015 / 7:45 AM / 5 years ago

UPDATE 3-SNB says ready to intervene in FX market if necessary

(Adds comments from SNB board member)

ZURICH, March 26 (Reuters) - Switzerland’s currency is still significantly overvalued and the Swiss National Bank is prepared to intervene in the foreign exchange market if necessary, SNB bank board member Fritz Zurbruegg said on Thursday.

In a speech in Zurich, he also defended the central bank’s shock decision in January to abandon its three-year-old cap on the franc, saying it had become too costly to defend.

“The SNB will continue to take account of the exchange rate situation in formulating its monetary policy and will intervene in the foreign exchange market as necessary in order to influence monetary conditions,” Zurbruegg said in the speech.

The SNB’s removal of the 1.20 per euro ceiling on the Swiss franc sent the currency soaring and stocks plunging, and raised fears for Switzerland’s export-reliant economy.

Earlier on Thursday, the SNB said in its annual report it spent 25.8 billion Swiss francs ($26.9 billion) on defending the cap late last year, having made no interventions during 2013.

It said continuing to defend the cap would have led to an “uncontrollable expansion” of the balance sheet to several times greater than the country’s annual economic output.

“The risks associated with such a balance sheet expansion would have been out of all proportion to the benefits for the economy,” added Zurbruegg. He said in January that interventions would have cost the SNB 100 billion francs in that month alone.

The decision to drop the cap is still reverberating in Switzerland, with politicians stepping up their criticism of the SNB as the economy falters in part due to the strong franc.

The central bank said in its report it does not rule out suspending profits to its shareholders — mainly the Swiss government and cantons — or lowering payout levels, echoing comments made in January.

The International Monetary Fund said on Monday the franc was overvalued in early 2015 and the SNB should consider easing monetary policy further to limit a slowdown in economic growth, potentially through pre-announced asset purchases.

The Swiss KOF institute expects Switzerland’s economy to eke out slight growth in 2015 after dipping into a mild recession for part of the year due to the surge in the franc.

$1 = 0.9586 Swiss francs Reporting By Katharina Bart, Alice Baghdjian and Joshua Franklin; Editing by Catherine Evans

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