UPDATE 2-Swiss National Bank fears trade war could fuel franc demand


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ZURICH (Reuters) – The Swiss National Bank fears that a rise in global trade tensions and protectionism could trigger renewed demand for the Swiss franc, even as the central bank keeps its ultra-expansive monetary policy in place.

FILE PHOTO – Swiss National Bank (SNB) Chairman Thomas Jordan gestures during a news conference in Bern, Switzerland December 14, 2017. REUTERS Denis Balibouse

Chairman Thomas Jordan said U.S. protectionism could become a threat to the export-dependent Swiss economy and could quickly trigger safe-haven flows that would drive up the value of the currency.

The SNB has been using negative interest rates and massive foreign currency purchases for three years to weaken the franc, whose strength weighs on exports.

By keeping its policy on hold and saying it still regarded the franc as “highly valued”, the SNB indicated it was in no rush to start raising interest rates despite baby steps by the European Central Bank to roll back its own stimulus program.

“A safe haven is above all sought when there are political uncertainties or great changes on the financial market, when the mood becomes pessimistic,” Jordan told the Swiss broadcaster SRF.

This could be triggered by protectionism, but there are also other risks like a conflict between Europe and Russia, or America and North Korea, Jordan said.

“All of these things can change the estimates of the financial markets overnight, and then the franc can be quickly sought again as safe haven,” he added.

Jordan noted that Switzerland was “dependent upon an open world market”, adding: “If customs duties or non-tariff restrictions are built up, that would not be good for Switzerland.”


Last week, in the wake of U.S. President Donald Trump’s plans to impose tariffs on imports of steel and aluminum, European Central Bank President Mario Draghi described unilateral decisions on trade policy as dangerous.

At the same time, the ECB took another small step in weaning the euro zone economy off its protracted stimulus by dropping a long-standing pledge to expand its bond buying if needed.

The Swiss are widely expected to wait for the ECB to start increasing interest rates before raising rates themselves late this year or next year.

Any earlier move by the SNB could drive up the franc and reverse recovery from a currency shock three years ago when the SNB removed its franc cap against the euro.

The SNB remained ultra-cautious in its latest policy update, keeping its target range for the three-month London Interbank Offered Rate (LIBOR) at -1.25 to -0.25 percent, as expected by every economist polled by Reuters. It kept the interest rate it charges on sight deposits at -0.75 percent.

But in a signal that potential tightening was not totally off the table, it forecast Swiss inflation would rise above its target of less than 2 percent during 2020.

“Given the lag in the effect that changes in monetary policy have on consumer prices, an increase in interest rates in June 2019 would be both appropriate and necessary,” said Martin Weder, an economist at Zuercher Kantonalbank.

But in the current uncertain environment, caution remains the watchword for the SNB, said Charlotte De Montpellier, an economist at ING. “The bank definitely doesn’t want to see the franc strengthening,” she said.

The SNB warned that a rise in Swiss residential investment property prices posed a mid-term risk of a drop, adding it was keeping a close eye on mortgage and property markets.

Reporting by John Revill; Editing by Michael Shields and Kevin Liffey


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