Switzerland's central bank has the means and credibility to defend its cap on the franc, said a top government economist, who also warned of the dangers of making monetary policy a political issue.
Investors seeking a safe-haven from the deepening euro zone debt crisis pushed the franc up to near parity with the euro early last August, hurting Swiss exporters and prompting the Swiss National Bank to impose a cap of 1.20 francs per euro on September 6 to stave off a recession.
The franc has slowly been gaining ground against the euro in recent weeks as the euro zone crisis has continued to weigh on financial markets. With the central bank lacking a permanent head following the resignation of Philipp Hildebrand this month, many in the market see the SNB as easier to take on, even though interim chief Thomas Jordan has stressed his commitment to the cap.
Aymo Brunetti, chief economist for the Swiss government, however, said the SNB's credibility had not suffered due to Hildebrand's departure, which followed an uproar over a currency trade made by Hildebrand's wife. "Technically the level can be held. An appreciation can be combated because the means are there. Clearly, they involve certain risks but the cap is tenable," Brunetti told Reuters in an interview. "I think credibility is really key and the SNB has a high level of credibility."
Were euro zone leaders able to come up with and enact a solution to the debt crisis that markets deemed credible, that would ease pressure on the franc, he said.
When Hildebrand was chairman, the SNB drew sharp criticism after it posted a record annual loss in 2010 due to its currency interventions and because the country's 26 cantons (states) were at risk of not receiving their customary dividend. More recently, some politicians have called on the SNB, whose independence is enshrined in the constitution, to shift the cap to 1.30 or 1.40 to the euro to help exporters.
Brunetti, however, warned that the central bank must remain free from political interference.
"The big asset of a central bank is its independence from politics. A central bank has to be really independent and to be able to carry out its policy under a clearly defined mandate," he said. "So I think it would be good if the current tendency to politicise would diminish."
The government said in December it expects economic growth to slow to 0.5 percent this year, from between 1.5 and 2 percent in 2011 , citing the euro zone crisis and its effects on Swiss exporters. "A crucial assumption for all forecasts today is that there's no catastrophe in the euro zone. Under this assumption, the fundamental assessment hasn't changed since December," Brunetti said. "If at all, some indicators have in fact turned out better than expected." In a sign that pressure on exporters may be easing, manufacturing expanded in December after three months of contraction, while Swiss investor sentiment posted its biggest jump in January in nine months, although it remained in negative territory.
Despite having to bail out its biggest bank, UBS, Switzerland emerged from the financial crisis without ballooning government debt. Even though growth is expected to slow down the federal government expects to reduce its debt this year. Brunetti, however, warned of the dangers of complacency, saying significant reforms to the social insurance system were needed to overcome a funding cap. If key reforms were not undertaken, Switzerland's debt-to-GDP ratio would surely rise in the long term, he said.
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