Switzerland’s central bank left its limit on the franc unchanged, resisting pressure from exporters to further curb the strength of the currency as officials take time to assess deflation risks.
The currency strengthened as the Swiss National Bank (SNB), led by Swiss National Bank President Philipp Hildebrand, kept the franc’s minimum exchange rate at 1.20 per euro yesterday. That is in line with the forecasts of nine out of 13 economists in a Bloomberg News survey. The Zurich-based central bank also maintained its benchmark interest rate at zero.
The SNB has defended the limit for three months without a breach after pledging to buy “unlimited” quantities of foreign currency to do so. Officials have weighed the risks of instituting a higher franc floor at a time of a worsening European fiscal crisis against the threat of deflation as the Swiss economy cools.
The SNB in its statement reiterated its pledge to defend the exchange rate limit with “utmost determination.”
It predicts inflation of minus-0.3 percent next year and stopped short of warning explicitly of deflation risks.
“In the foreseeable future, there is no risk of inflation,” the SNB said. “If foreign demand were to fall off more sharply than expected, downside risks to price stability would emerge.”
The franc, seen as a haven in times of turmoil, gained as much as 37 percent against the euro in the year before the SNB imposed the limit on Sept. 6, as European leaders failed to contain the debt crisis. It reached a record 1.0075 on Aug. 9.
The currency strengthened to 1.22977 per euro as of 9:56am in Zurich yesterday after the decision, trading up more than 0.8 percent on the day.
“Even at the current rate, the Swiss franc is still high and should continue to weaken over time,” the SNB said in its statement. “The SNB stands ready to take further measures at any time if the economic outlook and the risk of deflation so require.”
Meanwhile, the euro snapped a three-day decline against the US dollar following a media report that the European Central Bank (ECB) is pushing to change capital rules for banks to prevent a credit crunch.
The 17-nation currency rose earlier in European trading after Market News International said the ECB was supporting a new proposal that would deter banks from dumping riskier assets to boost capital levels, citing sources it did not name. The euro also advanced as Spain prepared to sell as much as 3.5 billion euros (US$4.55 billion) of bonds yesterday.
“A little bit of less-bad news and technical factors are pushing the euro higher,” London-based UBS AG currency strategist Geoffrey Yu said, citing the Market News report.
The euro was little changed at US$1.2987 at 9:17am London time after rising as much as 0.4 percent. It fell to US$1.2946 on Wednesday, the lowest since Jan. 11. The common currency was also little changed at ￥101.31. The yen gained 0.1 percent to ￥78.03 per US dollar.
Spain planned to sell as much as 3.5 billion euros of debt maturing in 2016, 2020 and 2021 yesterday. Italy on Wednesday had to pay the most in 14 years to sell five-year notes as its parliament rushes to pass a 30 billion euro budget plan that Italian Prime Minister Mario Monti said would bring down borrowing costs.