Swiss central bank bracing for Brexit 'turbulence'

16th June 2016, Comments 0 comments

The head of Switzerland's central bank warned Thursday that the Swiss economy could face turbulence if Britain opts to exit the EU in next week's referendum, vowing to "take measures if required".

"As a small open economy, Switzerland is highly exposed to developments abroad," Thomas Jordan told reporters following the Swiss National Bank's quarterly policy meeting.

"Next week's UK referendum on whether to remain in the EU may cause uncertainty and turbulence to increase," he said, stressing that "we will be monitoring the situation closely and will take measures if required."

The Swiss franc, long considered a safe haven currency, has already seen its value surge since the publication at the weekend of polls suggesting the so-called Brexit could win the day in the June 23 vote.

A stronger franc hits Swiss exporters, which are forced to squeeze costs and cut prices to remain competitive on an international market.

The Swiss central bank introduced a negative deposit rate early last year after it abruptly abandoned its three-year effort to hold down the franc's exchange rate to protect exports.

The bank said Thursday it was maintaining the -0.75 percent rate, which is meant to dissuade foreign investors buying and holding Swiss francs as a safe haven investment.

The target range for the three-month Libor also remained unchanged at between -1.25 and -0.25 percent.

"Our monetary policy thus continues to be based on two key elements: the negative interest rate and our willingness to take an active role in the foreign exchange market," Jordan explained.

"Both are intended to make Swiss franc investments less attractive, thereby easing pressure on the franc," he said, pointing out that "the franc remains significantly overvalued."

Capital Economics analyst Jennifer McKeown said the Swiss central bank's decision to leave its interest rates unchanged was expected.

"An actual Brexit would most probably prompt the SNB to cut interest rates further into negative territory," she predicted in a note to clients, but warning that even cutting the deposit rate to -1.0 percent "would be unlikely to prevent a significant appreciation of the franc."

The central bank meanwhile said it expected prices to slide 0.4 percent in Switzerland this year, compared to the 0.8-percent deflation it had predicted in March. But now expects a return to a slight inflation of 0.3 percent in 2017, up from the 0.1 percent previously predicted.

The bank left its economic growth forecast for this year unchanged at between 1.0 and 1.5 percent.

"We expect the global economic recovery to sustain over the next few quarters," Jordan said, warning though that "significant risks remain."

Among other things, he said, "the imminent UK referendum on whether to stay in the European Union has already caused volatility on the financial markets to rise."

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© 2016 AFP

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