The Swiss central bank’s inflation forecasts may be doing more to rein in the Swiss currency than 171 billion francs ($176 billion) of foreign-exchange purchases. The franc has dropped 2.3 percent against the euro since Sept. 16, when the Swiss National Bank cut its inflation outlook through 2013. The weaker price outlook also prompted economists at banks from UBS AG to Goldman Sachs Group Inc. to push back their predictions for interest-rate increases from the SNB. “The latest inflation forecast is justified as the previous was too high,” said Michael Saunders, chief economist for Western Europe at Citigroup Inc. in London. “It has the helpful effect of reducing pressure on the Swiss franc. In effect, it works like a verbal intervention.” The weakening franc reduces pressure on the SNB to intervene in currency markets after its foreign-currency reserves quadrupled in the 15 months through June, sparking a $15 billion loss in the first half of 2010. Policy makers led by President Philipp Hildebrand had tried to slow the currency’s 15 percent rally in the past two years to protect the country’s export-led recovery and counter deflation risks. The franc’s decline also gives the SNB a reprieve as tensions about global exchange-rate fluctuations spark speculation about what Brazilian Finance Minister Guido Mantega calls a “currency war.” The Bank of Japan last month sold yen for the first time in six years to limit gains, while U.S. authorities have accused China of limiting the yuan’s advance. New Outlook “The new inflation outlook plays into the SNB’s hands,” said You-Na Park, a currency analyst at Commerzbank AG in Frankfurt. There might be a “tactical element. The central bank avoids the dilemma of having to raise rates while at the same time keeping a lid on the franc.” The SNB’s cut to its three-year inflation outlook last month was the biggest in its history, according to UBS. The bank lowered its 2011 forecast to 0.3 percent from 1 percent in June and the 2012 projection to 1.2 percent from 2.2 percent. Based on unchanged interest rates, inflation won’t breach the SNB’s 2 percent ceiling until the second quarter of 2013, a year later than previously projected. The franc was at 1.3358 per euro late yesterday in Zurich compared with 1.3053 the day before the forecasts were published. It has shed about 4 percent since Sept. 8, when it reached a record 1.2766 against the euro. While the SNB’s new inflation outlook hasn’t stopped the franc climbing to a record against the dollar, the euro’s exchange rate matters more to policy makers because 55 percent of Swiss exports go to the currency bloc. Just 10 percent of exports are sold to the U.S. Purchases “With their new inflation outlook, the SNB has achieved more than with all the interventions before,” said David Marmet, an economist at Zuercher Kantonalbank in Zurich. “The SNB spent huge amounts on currency purchases and it didn’t keep the franc from appreciating.” The franc has risen about 4 percent against the dollar in the past month, strengthening with other major currencies on speculation that the Federal Reserve will expand asset purchases. The weaker Swiss inflation outlook prompted Goldman Sachs to push back its forecast for the first rate increase to June 2011 from March 2011. Credit Suisse Group AG now predicts the SNB to keep its benchmark interest rate at 0.25 percent until June instead of December and UBS on Oct. 15 revised its rate forecast for the second time in a month to March from December. G-20 Meeting “We find it increasingly difficult to look for a monetary tightening at a time when many other economies conclude that they need to expand their balance sheets,” UBS economist Reto Huenerwadel in Zurich said. “The SNB’s current inflation forecast does not make the case for higher rates anytime soon.” Easing concern about Europe’s debt crisis has also helped take pressure off the franc as investors shift out of currencies traditionally considered safe havens in times of turmoil. Hildebrand heads to Seoul this weekend to meet finance officials from the Group of 20 nations after they failed to narrow differences over currencies at a gathering in Washington this month. China was accused of undervaluing the yuan, while low U.S. interest rates were blamed by emerging markets for flooding them with capital. Brazil took aim at both the U.S. and China. For the SNB, any further intervention in currency markets may come “at a cost,” Hildebrand says. The SNB’s foreign- currency holdings swelled to the equivalent of 227 billion francs in June from 55.8 billion in March 2009. Euro holdings account for more than two thirds of reserves and the added exposure makes the central bank vulnerable to currency swings. Inflation forecasts were a “nice trick” to ward off franc pressure, said Sebastian Wanke, an economist at Dekabank in Frankfurt, who expects the SNB to keep borrowing costs on hold through 2011. “They might well intervene again within the next six to nine months, but I don’t expect them to do anything anytime soon.” To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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