ZURICH: The Swiss National Bank might seek authority to stop commercial banks converting reserves into cash if its current policy arsenal failed to prevent a major appreciation of the franc, economist Nouriel Roubini’s research group said.
A report published by the group on Monday after a meeting with SNB officials outlined how the bank might respond should currency intervention not curb market turmoil, perhaps in the event of a British vote to leave the European Union.
One option would be to prevent banks from switching reserves into cash. That would require a new law, but the Roubini Global Economics report said SNB officials “were confident that the legislation could be changed …to give the bank this authority”.
The SNB, which now uses negative interest rates and currency intervention as its main tools to keep the strong franc in check, declined to comment on the report.
The SNB’s preferred tool for easing would remain FX intervention, though additional and possibly “irregular size” cuts to the policy rate might be made “if a large shock threatened to trigger massive franc appreciation particularly versus the euro,” the group said.
The central bank was unlikely to ease policy at its next ratesetting meeting on June 16, it said.
Roubini, who famously predicted the 2008 financial crisis, is also a professor at New York University’s Stern School of Business.
Should Britain’s “Leave” camp win the Brexit referendum on June 23, currency intervention alone might not be enough to keep a lid on the franc, Roubini said.
“We believe the SNB has the ability to reduce the sight deposit rate to -1 percent (or even -1.25 percent if it decided against adopting other tools such as quantitative easing)”, it said. The SNB now charges banks 0.75 percent on some deposits, and aims to keep three-month LIBOR around -0.75 percent as well.
The first cut in the sight deposit rate would likely be 25 basis points, the Roubini group said.
“SNB officials say they do not have an issue using ‘irregular size’ cuts if they get a big enough bang; firing ‘smaller bullets’ would allow the bank to fire more shots before reaching -1 percent. We cannot rule out a cut larger than 25 basis points (either) if warranted,” the report said.
Roubini’s group said SNB remained comfortable with developments in the real economy but was not happy about the deflation that Switzerland is experiencing.
“However, SNB officials are willing to be patient on this score, as many deflationary drivers are external,” it said.
“Given the extremely low level of interest rates, the SNB is keeping some ammunition in reserve.”
Copyright Reuters, 2016
Courtesy : BRecorder