SNB Stresses Resolve on Franc as Interest Rate Stays at Zero

The Swiss central bank said it’s ready to take “further measures” if needed to stem gains in the franc against the euro as it left its benchmark interest rate at zero to ward off the threat of a recession.

The Swiss National Bank, led by Philipp Hildebrand, kept its three-month Libor target rate at zero after unexpectedly lowering the benchmark from 0.25 percent last month. That’s in line with the forecasts of all 21 economists in a Bloomberg News survey. The Zurich-based central bank also reiterated it will defend its currency ceiling with the “utmost determination” and forecast economic growth to come to a halt in the second half with consumer prices falling in 2012.

The SNB imposed ceiling of 1.20 against the euro on Sept. 6 and pledged to purchase foreign currencies in “unlimited quantities” to protect the economy. The franc’s ascent to a record last month has hurt some of the country’s largest companies including foodmaker Nestle SA and sparked an economic slowdown in the second quarter.

“They are very, very pessimistic,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “Forecasting deflation for next year seems far-fetched to me. It might merely serve as a justification for introducing a cap.”

The Swiss currency, which is considered a haven in times of turmoil, reached a record of 1.0075 against the euro on Aug. 9 on investor concern that European governments may be unable to contain the region’s debt crisis. The franc has remained above 1.20 versus the single currency since the SNB imposed the cap, and was little changed at 1.2079 at 11:05 a.m. in Zurich today.

‘Acute Threat’

“With these measures, the SNB is taking a stand against the acute threat to the Swiss economy and the risk of deflationary development that spring from massive overvaluation of the Swiss franc,” the central bank said. “If the economic outlook and deflation risks so require, the SNB will take further measures,” it said without elaborating.

With the franc’s ascent hurting exports, the economy may expand between 1.5 percent and 2 percent this year, the SNB said. It had previously forecast economic growth of about 2 percent. Inflation may average 0.4 percent in 2011, down from a previous forecast of 0.9 percent, it said. In 2012, consumer prices may drop 0.3 percent before rising 0.5 percent in 2013.

‘Downside Risks’

The SNB, which aims to keep inflation below 2 percent, forecast annual consumer-price growth to reach 1 percent in the second quarter of 2014. In June, it had estimated inflation at 2.6 percent in the first quarter of that year.

“In the foreseeable future, there is no risk of inflation in Switzerland,” the central bank said. “There are, however downside risks for price stability, should the Swiss franc not weaken further.”

With exports accounting for about half of gross domestic product, the Swiss economy may fail to gather strength after expanding 0.4 percent in the second quarter. That’s the weakest since a 2009 recession. The KOF economic indicator dropped to the lowest in almost two years last month and manufacturing growth weakened. Investor confidence also slumped in August.

“The SNB expects growth to come to a halt in the second half of the year,” it said in the statement. “Without the stabilizing effect of the minimum exchange rate, there would be a substantial threat of recession.”

SNB Rates

Nestle, the world’s largest foodmaker, said on Sept. 1 it will seek to offset the franc’s impact through productivity gains. Holcim AG, the world’s second-biggest cement maker, said on Aug. 18 that currency effects shaved 203 million francs ($231 million) off operating profit in the second quarter and Swiss chemicals maker Clariant AG cut its full-year earnings targets on Sept. 5 partly on a stronger currency.

SNB policy makers unexpectedly cut borrowing costs last month and boosted liquidity to money markets to help weaken the franc. Hildebrand said on Sept. 6 that while costs of the currency ceiling may be “very high,” doing nothing “would almost certainly inflict tremendous long-term damage” to the economy.

“The SNB will do whatever it costs to fulfil its commitment,” said Julien Manceaux, an economist at ING Group in Brussels in an e-mailed note. “It becomes very unlikely to see any rate hike in Switzerland any time soon.”

The central bank last introduced a currency cap in 1978 to stem gains versus the Deutsche mark.