World Economy

SNB Intervenes to Curtail Inflation

SNB Intervenes to Curtail InflationSNB Intervenes to Curtail Inflation

The Swiss National Bank may need to keep up a steady pace of intervention to bring inflation back into positive territory and support the economy as the franc settles on what the SNB calls a “significantly overvalued” perch, economists say.

Currency intervention and negative interest rates comprise the SNB’s two-pronged strategy to rein in the franc, whose strength hamstrings the export-led Swiss economy, Reuters reported.

A weaker franc helps dampen deflationary pressure from import prices and makes exports more competitive.

Consumer prices fell 0.9% year-on-year in March while unemployment rose to a seasonally adjusted 3.5%, data released on Friday showed.

Year-on-year consumer prices have fallen every month since October 2014 and are expected to continue declining throughout 2016. The SNB expects them to return to just 0.1% growth in 2017.

The franc has kept in a tight range between 1.08 (87%) and 1.10 per euro for much of the past eight months, while the euro has gained against the dollar since November. It fell below 1.09 per euro this week, which some economists said could spur the SNB to act.

However, a Reuters poll in March did not foresee further rate cuts, instead expecting the SNB to shift weight onto more interventions instead.

As hopes for a gradual weakening of the franc—which soared against other currencies when the SNB lifted its minimum exchange rate against the euro in January 2015—have failed to materialize, the central bank finds itself in a bind if it wants to provide a sluggish economy with more of a boost.

“If the SNB needs to intervene even in a period when the euro is rising against other currencies, that highlights the risks should a growing SNB balance sheet curb further interventions,” Commerzbank analysts wrote in a note.