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Swiss central bank holds forex floor, warns of threat to economy

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(Globalpost/GlobalPost)

The Swiss central bank insisted on Thursday it will continue defending the floor rate of the Swiss franc against the euro, a policy which could come under increasing strain if more investment funds flow into the currency for safety.

The Swiss National Bank also announced it was keeping its record low interest rates intact.

But it warned that "an appreciation of the Swiss franc would compromise price stability and would have serious consequences for the Swiss economy."

The bank introduced a minimum exchange rate of 1.20 Swiss francs to the euro in September 2011, as fears of an imminent euro implosion coupled with concerns about soaring US debt levels, pushing investors to seek cover in the safe Swiss franc.

While the Swiss economy has remained a rare bright spot on the European map, the surging value of the franc created headaches for exporters, which have seen margins eroded by unfavourable exchange rates.

The Swiss franc has fallen recently amid a rosier outlook for the European common currency, sparking calls for the Swiss bank to remove its floor.

But SNB pointed out Thursday that at 1.26 francs to the euro, "the Swiss franc is still high," stressing that it stood "ready to enforce the minimum exchange rate, if necessary, by buying foreign currency in unlimited quantities."

It was essential to hold onto the floor, it said, "in order to avoid an undesirable tightening of monetary conditions for Switzerland in the event of sudden upward pressure on the Swiss franc."

Despite the floor, official data revealed earlier on Thursday that Swiss exports slumped 0.9 percent last month in terms of value to 17.4 billion Swiss francs amid weak demand in the EU, Switzerland's main trading partner.

The country's vital watch industry suffered a set-back of a full 3.9 percent.

And Capital Economics analyst Ben May said the franc was "likely to remain a drag on growth," in Switzerland, adding "we expect the economy to grow more slowly than the bank's forecasts imply."

SNB said on Thursday it expected the economy to grow between 1.0 and 1.5 percent this year.

It also said it expected inflation to tick in a bit lower than previously anticipated, at minus 0.3 percent this year -- meaning prices will fall, while the inflation forecast for 2014 and 2015 remained unchanged at 0.2 and 0.7 percent.

In this environment, the bank said it was maintaining its record low target range for the three-month Libor rate, at 0.0-0.25 percent.

It stressed that "the risks for the Swiss economy remain high," pointing out that "a weakening in global economic momentum cannot be excluded."

"Further developments in the euro area financial and sovereign debt crisis remain uncertain (and) tensions can reappear at any moment on global financial markets," it said.

It added that Switzerland also faced a domestic risk of increased imbalances on the mortgage and real estate markets.

May meanwhile suggested that if economic growth did not meet the bank's expectations, it "may eventually take further action to support the economy, perhaps by employing negative interest rates."

Switzerland is not a member of the European Union, and has control of its interest rates.

In general the central bank has broadly shadowed monetary policy for the eurozone set by the European Central Bank in Frankfurt.

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http://www.globalpost.com/dispatch/news/afp/130620/swiss-central-bank-holds-forex-floor-warns-threat-economy