SNB Leaves 1.20 EUR-CHF Cap Intact; Not To Tolerate Further Currency Gains

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The Swiss National Bank on Thursday decided to retain the exchange rate cap and the near-zero interest rate, but said it "will not tolerate" further gains in the currency and is prepared to take necessary measures at any time.

The central bank said it will continue to enforce the minimum exchange rate of CHF 1.20 per euro "with the utmost determination." The bank said it is prepared to buy foreign currency in unlimited quantities for this purpose.

Swiss policymakers imposed a ceiling of 1.20 versus euro in September last year to stem excessive gains in the currency following the worsening of the Eurozone debt crisis.

The target range for the benchmark three-month Libor was kept unchanged at 0.00-0.25 percent.

According to the bank, the Swiss franc is still high even at the current rate. "Another appreciation would have a serious impact on both prices and the economy in Switzerland. The SNB will not tolerate this. If necessary, it stands ready to take further measures at any time," the bank said in a statement.

The bank warned that the risks for the Swiss economic situation remained "exceptionally high."

Addressing the media after the monetary policy meeting, SNB President Thomas Jordan said the bank expects a significant slowdown in GDP growth in the second quarter.

"Since the global economy is expected to recover slowly, and the value of the Swiss franc is still high, the demand for exports is likely to remain subdued, even in the subsequent period," he said.

"Only because of the unexpectedly strong winter half-year does the SNB now expect growth of around 1.5 percent for 2012," he said.

Jordan, who was appointed President on April 18, said last month that the bank is considering setting up a task force to draw an emergency plan for dealing with a possible collapse of the euro. The measures under consideration included capital controls, according to him.

In the Financial Stability report released today, SNB warned that the the risk of rapid, marked deterioration in the Swiss banking sector remained high. Big banks' loss absorbing capital is not sufficient to ensure resilience, the report found.

The State Secretariat for Economic Affairs (SECO) on Tuesday raised its 2012 GDP outlook to 1.4 percent from the 0.8 percent projected in March. But it warned that the outlook is subjected to serious downside risks, mainly due to deteriorating environment in Europe.

Swiss economic growth accelerated to 0.7 percent in the first quarter from the 0.5 percent expansion in the fourth quarter, data showed last month.

The SNB's conditional inflation forecast remained almost unchanged from its March forecast. For 2012, the bank expects consumer prices to fall 0.5 percent, little changed from its March forecast for a 0.6 percent fall.

The inflation forecasts for 2013 and 2014 were left intact 0.3 percent and 0.6 percent respectively. SNB said that in the foreseeable future, there is no inflation risk in Switzerland.

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