SNB `Up Against Wall' as Franc's Surge Hurts Exports
Pressure is mounting on the Swiss central bank to cut interest rates as a surge in the franc threatens to derail exports, exacerbating the impact of the global financial crisis on Europe's eighth-largest economy.
An 8.7 percent gain in the franc against the euro this month is eroding the value of Swiss exports in their biggest market just as sputtering growth worldwide squeezes sales. European Central Bank President Jean-Claude Trichet said yesterday he may cut rates next week, bolstering calls for the Swiss National Bank to follow suit.
“The Swiss National Bank is up against the wall,'' said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. “Economic confidence has collapsed rather dramatically and now the appreciation of the Swiss franc has come as a shock. The need to cut rates has increased considerably.''
Stock markets have plunged the most in 70 years this month on concern the financial turmoil will develop into a prolonged economic slump. Switzerland's main equity index has lost more than 16 percent since Oct. 1. Bond prices soared and the franc, dollar and yen surged as investors sought traditionally safe investments.
“The franc's safe-haven status is having a massive revival,'' said Andreas Kueffer, currency strategist at Zuercher Kantonalbank in Zurich. “We're mainly an export-oriented economy and we also need tourism. This isn't a positive development for Switzerland.''
Cheese Maker
Emmi AG, Switzerland's biggest cheese maker, today said it may miss its goal for growth in foreign sales because of the franc's gains against the euro. Bobst Group SA yesterday said the currency's strength is hurting sales just as the global economy is slowing.
In Germany, the biggest buyer of Swiss products, business confidence is at five-year low. The International Monetary Fund on Oct. 7 predicted growth in the 15 countries sharing the euro would slow to just 0.2 percent next year, the weakest since the single currency was introduced in 1999, from 1.3 percent this year.
Exports of services and Swiss goods including Swatch watches and Nestle food products account for about 55 percent of the nation's gross domestic product, according to government data. More than half of those exports are sold in the 27 countries of the European Union.
Export Growth
Swiss sales abroad declined last month for the first time in almost four years and the government forecasts export growth will slow this year to 3 one hour cash advance loan.4 percent after reaching about 10 percent in each of the previous two years. The economy may contract this quarter and in the first three months of 2009, the Zurich-based KOF economic research institute said Sept. 5.
A 56 percent decline in the price of oil since it reached a high of $147.27 a barrel July 11 is helping damp inflation and may give the SNB more room to cut rates.
“The SNB's only real constraint now is timing,'' Poser said. “The big question is whether they'll be able to wait until their December meeting.''
Investors have increased bets the SNB will cut rates this year, futures trading shows. The implied rate on the 3-month Liffe contract expiring in December dropped to 2.26 percent today from 2.50 percent Oct. 20.
The SNB cut its benchmark rate to 2.5 percent Oct. 8 as part of a coordinated effort by global central banks to thaw frozen money markets and prevent financial markets from collapsing.
`Interest-Rate Lever'
“If the SNB waits until December and the ECB cuts before them — that could exacerbate the situation with the franc,'' Poser said. “If the current situation persists, the SNB is going to have to pull the interest-rate lever more strongly than anyone assumes.''
Lending between commercial banks ran dry after Lehman Brothers Holdings Inc. filed for bankruptcy-court protection on Sept. 15, sending borrowing costs to records. The cost of borrowing francs in London for three months fell for a sixth straight day today to 2.87 percent after the rate jumped to the highest in seven years Oct. 10.
The SNB this month cut its target interest rate, introduced a swap agreement with the ECB to provide additional franc funding in European countries and joined the government in rescuing UBS AG, the country's biggest bank.
“The central bank is probably not very happy about the speed of the move. The SNB knows how tumultuous that move is for businesses,'' Kueffer said. “At the moment, they could drop the interest rate to zero and people would still want francs.''
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