ZURICH: Switzerland’s central bank is fighting to keep the value of the franc down as Greece enters a new period of uncertainty and political turmoil that may spur safe-haven inflows into the currency.

The Swiss National Bank has given rare confirmation that it intervened on foreign-exchange markets to stem the franc’s rise, which is the main focus of monetary policy.

Since dropping its limit on the franc’s value at 1.20 per euro in January, the SNB has imposed negative interest rates, a charge on some cash deposits and intervened on currency markets.

With Switzerland’s export-reliant economy already hit hard by the franc’s strength and negative inflation forecast this year and next, the SNB is seen left with few policy options. Here are main scenarios that economists say face the SNB:

ASSET PURCHASES: Switzerland could consider easing monetary policy further by launching a programme to buy foreign-currency assets and some domestic assets, the International Monetary Fund recommended in March.

Given the reluctance of the central bank to expand its balance sheet, as expressed by its decision to remove the minimum exchange rate, such a programme appears unlikely as long as the franc does not appreciate materially, deflationary risks are not increasing substantially and the Swiss economy does not fall into severe recession, said Credit Suisse economist Maxime Botteron.

FOREX INTERVENTION: Pledges to intervene in currency markets, along with negative interest rates, are the SNB’s main policy tool at the moment. Buying euros and selling francs would help hold down the franc, according to economists, but may bulk up the central bank’s balance sheet. The SNB cited balance sheet risk as a key reason for dropping its long-standing cap in January. Currency reserves, at 517.5 billion francs ($550.1bn) in May, have swollen as a result of the SNB’s moves.

BOND BUYING: The ECB has launched a 1 trillion-euro “quantitative easing” scheme to buy government bonds and other assets and stimulate a sagging eurozone economy. The SNB tried buying back government bonds following the financial crisis, but the measure was not seen as successful in easing monetary conditions.

Economists say Switzerland’s small and illiquid government bond market, where most investors hold bonds to maturity, is not suited for a large-scale bond repurchase programme.

LOWER INTEREST RATES: The SNB said it hasn’t reached the lower bound for the Swiss franc cash deposit rate, now at -0.75 per cent, and could push it further into negative territory. Economists say it would probably lower benchmark interest rates at the same time.

Published in Dawn, July 4th, 2015

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