SNB Vice President Says Rate Hike would Lead to Eliminating Cap

Jean-Pierre Danthine, the Swiss National Bank Vice President has indicated that the central bank will abolish the ceiling on the franc when it starts raising interest rates. In an interview published yesterday, the SNB official said that once the central bank starts raising the rates, there will no longer be a restricting minimum exchange rate. However, he indicated that the bank is currently concentrating on the cap and it is willing to keep the cap as long as it is necessary.

The Vice President’s comments on the ceiling remaining intact comes after his counterpart, the SNB President, Thomas Jordan indicated in July that he has no intention of scrapping it anytime soon. The SNB imposed the cap of 1.20 per euro on the franc in September 2011, citing the need to ward off deflation and a recession. The central bank had already cut its benchmark interest rate to zero. The central bank won’t raise rates this year or next, according the median estimate of economists in an economic survey published Aug. 9.

Swiss house and apartment prices have soared in recent years, with mortgages kept cheap by the SNB’s loose policy. The SNB has repeatedly warned of overheating, and the government is requiring banks to hold more capital as a buffer, to guard against rising defaults.

Danthine said it was still too early to say whether the buffer would prevent the property market from overheating. He said borrowers might be overextending themselves and could be ill prepared for an increase in interest rates.

In the statement, he also indicated that SNB’s studies have shown that interest rate hikes would have a negative impact on financial institutions in the country. The statement also indicated that the bank have chosen a high-risk profile because the period of low interest rates will last longer.