SNB chairman: Global economy remains uncertain

Ooutlook of the Global economy remains uncertain, said Chairman of the Governing Board of the Swiss National Bank (SNB) Thomas Jordan said on Thursday. "The risk of a deterioration in the global economy continues to be high. As before, the biggest risk remains a renewed deterioration in the euro area financial and sovereign debt crisis. Even though our baseline scenario assumes a gradual solution of the crisis, it is possible that tensions could re-emerge on financial markets at any time," said Jordan in the annual conference of the Governing Board in the Swiss capital Berne. Jordan explained that in the first quarter, the growth of the global economy was weaker than expected, across the board. In many emerging markets, particularly China, economic activity lost strength. In the euro area, the recession continued, and in the US, the recovery remained hesitant. The only advanced economy to gain significant momentum was Japan. He stressed that "the Swiss National Bank (SNB) is maintaining its minimum exchange rate of CHF 1.20 per euro as the Swiss franc is still high. An appreciation of the Swiss franc would compromise price stability and would have serious consequences for the Swiss economy". In the current environment, the minimum exchange rate remains important in order to avoid an undesirable tightening of monetary conditions for Switzerland in the event of sudden upward pressure on the Swiss franc, he said. Jordan assured that the SNB stands ready to enforce the minimum exchange rate, if necessary, by buying foreign currency in unlimited quantities, and to take further measures, as required. The target range for the three-month Libor will be left unchanged at 0.0-0. 25 per cent. Since March, the SNB's conditional inflation forecast has remained almost unchanged, apart from inflation for the current year, which is slightly lower due to a reduction in the oil price. The forecast is again based on an unchanged three-month Libor of 0.0 per cent over the next three years. For 2013, we now anticipate slightly lower inflation of -0.3 per cent. In Switzerland, real GDP rose significantly in the first quarter. However, we expect a perceptible weakening in growth for the second quarter. Overall, we still anticipate growth of 1.0-1.5 per cent for 2013. According to Jordan, the risks for the Swiss economy remain high. They continue to originate, for the most part, from the international environment. A weakening in global economic momentum cannot be excluded. Further developments in the euro area financial and sovereign debt crisis remain uncertain. Tensions can reappear at any moment on global financial markets. Domestically, there is a risk that the imbalances on the mortgage and real estate markets will grow, given the sustained period of exceptionally low interest rates. Overall, lending has been growing faster than nominal GDP for several years. In addition, prices for owner-occupied apartments and single-family homes have risen strongly in the past few years. Given the sustained period of exceptionally low interest rates, there is a risk that the imbalances on the mortgage and real estate markets will increase further. This development jeopardises financial stability and, in the event of an abrupt correction, can have wide-reaching consequences for the real economy. Jordan explained that the SNB continues to face major challenges. In particular, the threat that the Swiss franc could suddenly come under upward pressure again has not been averted. In the current low interest rate environment, therefore, the minimum exchange rate remains the focal instrument for ensuring appropriate monetary conditions. The financial crisis has shown that for balanced economic development more than just price stability is required; financial stability must also be guaranteed. In Switzerland, the fact that the SNB is required to contribute to ensuring financial stability was already laid down in the National Bank Act of 2004. In addition, last year a new instrument was created - the countercyclical capital buffer - based on the lessons drawn from the financial crisis. At the beginning of the year, the SNB proposed that this buffer be activated, and the Federal Council decided in favour of an activation in February. The countercyclical capital buffer will come into effect from the end of September 2013 and will strengthen the resilience of the banking industry. Moreover, it will help to counter a further build-up of imbalances on the mortgage and real estate markets.