Swiss Forecast Cut; Franc Cap Remains

Central bank anticipates lower economic growth, larger drop in consumer prices

Geneva, Switzerland. Geneva, Switzerland.

The Swiss National Bank (SNB) has cut its growth forecast for the country’s economy, anticipating a bigger drop in consumer prices as well, and is holding firm on its cap on the franc’s growth against the euro.

Reuters reported Thursday that at its quarterly meeting the central bank revised its forecast for the Swiss economy downward from 1.5% for the year to only 1%, and said that it now expected consumer prices to fall 0.6%. It also declared again its intention not to allow the franc to rise beyond an exchange rate of 1.20 against the euro, saying that it would take additional steps to preserve that rate if it had to.

The SNB cited the effect such an increase would have on prices and growth as reasons for its determination. In its statement, it said in part, "Downside risks to the Swiss economy will also stay high in the near term."

In June the SNB’s quarterly statement referred to risks faced by the Swiss economy because of "uncertainty about future developments in the eurozone." However, in this latest statement, it instead referred to the global economy’s weakness, saying, "Growth prospects are being dampened by the euro area crisis, on the one hand, and the uncertainty surrounding forthcoming fiscal policy decisions in the U.S., on the other. The situation on the financial markets is also fragile."

The Swiss franc was capped last September, after safe-haven-seeking investors drove its value up by 20% over the course of just a few months. Despite the calls of trade unions and some exporters in the past year urging the SNB to weaken the franc further, towards 1.40, it has stood its ground.

In the report, Sarasin economist Jan Poser said of the SNB’s action, "They will stick to the lower band as strongly as they've stuck to it. It's still too high a risk to go toward 1.25."

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