Switzerland halves growth forecast as strong franc bites

[GENEVA] Switzerland on Thursday halved its growth forecast for 2015 as the strong franc bit into the country's exports, but the central bank said it was keeping its monetary policy unchanged.

The Swiss National Bank caused an upheaval in world currency markets when it suddenly scrapped its 1.20 franc cap against the euro in January.

The franc quickly strengthened by as much as 30 per cent, sparking protests from businesses and even bankrupting several international forex dealers. It was trading Thursday at 1.05 against the euro.

With the export-oriented economy's output hurt by the strong franc, the central bank said in a statement it was slashing its growth forecast to just under 1.0 per cent for 2015 from 2.0 per cent previously predicted.

Exporters were expected to see excess production capacity and unemployment was likely to rise "moderately," said the bank.

In a separate statement, the economy ministry also slashed its growth forecast for 2015 to 0.9 per cent from 2.1 per cent.

But central bank chief Thomas Jordan said it was too costly to keep the euro-franc cap which was first introduced in 2012.

"This would have saddled the Swiss economy with longer-term costs that would have been out of all proportion to the benefits of continuing to enforce the minimum exchange rate of 1.20 francs per euro," he said.

He added that "there are no real alternatives" to the negative interest rates in place in Switzerland as other countries have also pushed their rates to record lows.

"With the international low interest rate environment, monetary policy faces big challenges," he said.

"Overall, the Swiss franc is significantly overvalued. Negative interest helps to make investments in Swiss francs less attractive and thereby correct this overvaluation over time," said Mr Jordan.

The bank was therefore keeping its interest rate on sight deposits - funds which can be transferred immediately - at minus 0.75 per cent, while its target three-month Libor was maintained at between minus 1.25 per cent and minus 0.25 per cent.

AFP