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Switzerland keeps commitment to defend euro-franc peg

The Swiss National Bank (SNB) held a monetary policy meeting on Thursday and concluded that the Swiss franc is still high.

It decided to reaffirm its minimum exchange rate of 1.20 Swiss francs per euro and to keep its target range for the three-month LIBOR at 0-0.25%. As expected, the decision marks no change in monetary policy.

Although the euro has drifted higher from the 1.20 ceiling set in September 2011 due to the risk of deflation and a recession, the central bank has decided to keep its peg unchanged. Following the decision, the EUR/CHF was trading at 1.2330.

To defend the peg, the SNB said it was ready to buy foreign currency in unlimited quantities and to take further measures.

‘Although the situation on the global financial markets has eased somewhat, the minimum exchange rate, with the three-month Libor close to zero, remains essential. It prevents an undesired tightening of monetary conditions were the upward pressure on the Swiss franc to intensify once again,’ the central bank said.

The SNB cited no signs of inflation risks in Switzerland but increased the short-term forecast due to the rise in the oil price and a more positive assessment of the economic situation while keeping the longer term forecast unchanged.

The central bank pointed to risks such as structural problems in Europe, a deteriorated outlook for emerging economies and a potential push up in oil prices from events in the Middle East.

While it expects global growth to gradually gain in momentum and become more broad based, the recovery is likely to remain subdued, it said.

The SNB revised its 2013 growth forecast upwards from 1%-1.5% to 1.5-2% because of an unexpectedly positive second quarter.

Despite the higher forecast, the reaction by the Swiss franc was minimal following the decision. It posted the slightest of gains versus the euro, which it then reversed, and slightly extended the large gain produced against the US dollar on Wednesday following the Federal Reserve’s decision not to taper asset purchases.

The USD/CHF was trading at 0.9100, down from 0.9250 a day earlier.

JP

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