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SNB Says Franc's Decline Has Reduced 'Significant Overvaluation'

The Swiss National Bank tweaked its formal view of the franc’s level, saying that the currency’s decline against the euro is helping curb its “significant overvaluation.”
  • Central bank rates unchanged at record low, as predicted

  • SNB cuts growth forecast for 2017 to “just under” 1%

The Swiss National Bank tweaked its formal view of the franc’s level, saying that the currency’s decline against the euro is helping curb its “significant overvaluation.”

“Since the last monetary policy assessment, the Swiss franc has weakened against the euro and appreciated against the dollar,” the central bank said in a statement on Thursday. “Overall, this development is helping to reduce, to some extent, the significant overvaluation of the currency. The Swiss franc nevertheless remains highly valued, and the situation on the foreign exchange market is still fragile.”

The change evolves the label “significantly overvalued” that has featured in the SNB’s verbal repertoire since early 2015, when it put into force a policy of negative rates and interventions.

“For us, it’s not yet a sign that a monetary policy switch lies in store, since they said the foreign currency market situation remains fragile,” said Alessandro Bee, an economist at UBS Group AG in Zurich. “They’d want to see the weaker franc become sustainable before they adjust monetary policy.”

The central bank kept its deposit rate at a record low of minus 0.75 percent, as forecast by all economists in a Bloomberg survey. It also reiterated its pledge to buy foreign currencies.

An abatement of risk aversion and better economic momentum in the single currency area have caused the franc to drop more than 6 percent against the euro this year. It dropped to 1.15380 per euro in early August -- a level not seen since the SNB scrapped its 1.20-per-euro currency ceiling -- playing into the hands of the central bank, which has been trying to stem its rise for years. The franc was down 0.2 percent at 1.14859 per euro at 10 a.m. in Zurich.

Yet inflation remains feeble in Switzerland and economic growth fell short of that in the neighboring euro area during in the first half of 2017. The SNB cut its growth outlook for this year and now predicts expansion of just under 1 percent, compared with a previous forecast of roughly 1.5 percent. Consumer prices are foreseen increasing 0.4 percent in 2017 and 2018 and 1.1 percent in 2019, it said.

An uptick in risk aversion -- caused for example by another North Korean missile test -- could cause the franc, considered by foreign currency traders to be a haven at times of market stress, to appreciate again.

And although the franc has dipped against the euro, it has appreciated against the dollar in recent weeks, as the SNB acknowledged.

While European Central Bank and SNB policy makers are battling weak price pressures, soaring inflation in Britain may prompt Bank of England officials to call for tighter policy later on Thursday.

The SNB is aiming to achieve a positive annual rate of inflation below 2 percent. It has been using interventions to stoke consumer price pressure, causing its holdings of foreign currency to balloon to 717 billion francs ($744 billion). The negative interest rates is designed to maintain the rate differential with the euro area, making franc-denominated assets less attractive for investors.

The central bank maintained its target range for three-month Libor at between minus 0.25 percent and minus 1.25 percent.

Economists expect the SNB only to begin tightening once the ECB in Frankfurt starts to normalize policy. President Mario Draghi reiterated last week the asset purchase program would run until at least the end of this year, and that interest rates would remain at their current record-lows “well past” the end of quantitative easing.

“The SNB will not raise its interest rates before the ECB,” Valentin Bissat of Mirabaud Asset Management said prior to the decision.

— With assistance by Mara Bernath, Jurjen Van De Pol, Alice Baghdjian, Marco Babic, Jan Dahinten, Joel Rinneby, Harumi Ichikura, Alessandro Speciale, and Lukas Strobl

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