MNI INTERVIEW: Switzerland To Cut Interest Rates, Follow ECB

By Luke Heighton

     ZURICH(MNI) - Switzerland is likely to cut interest rates later this month

and could eventually take them much lower than the current policy setting of

-0.75%, a former senior economist at the Swiss National Bank told MNI.

     "If the ECB cuts rates, I would expect the SNB to follow," Daniel Kaufmann

said in an interview in Zurich, "because they have in the past reiterated that

they want to keep the interest rate differential relatively constant to avoid an

appreciation.

     "There is certainly still some room to go more negative; the question is

whether they wait until they have their official meeting, or whether they make

an exceptional rate cut if pressure on the Swiss franc would become too strong."

     The SNB's next rate-setting meeting is on Sept. 19, exactly one week after

the ECB is widely expected to announce a significant easing package, including a

rate cut.

     "My guess is they will lower the rate at most by 25 basis points, and then

monitor how the banking system responds. On the other hand, a change in the

ECB's policy creates a short-term tension for the SNB because they must

intervene more in the foreign exchange market."

     Kaufmann, who spent four years as senior economist at the central bank and

six as a senior member of staff before leaving in 20014, said it was very likely

the SNB would continue to be active in the FX markets, as it seeks to keep the

franc at an acceptable level, probably "slightly below 1.10 francs to the euro."

     The safe-haven franc continues to look "highly valued," in the words of SNB

chairman Thomas Jordan. But there have recently been suggestions that

Switzerland's interventions in the money markets could eventually lead the U.S.

to consider it a currency manipulator.

     "Exchange rate interventions are often regarded as beggar-thy-neighbour

policies; this certainly affects the thinking of Swiss policy makers," Kaufmann

said. "When they intervene in the foreign exchange market, or when they

introduced the minimum exchange rate, it was important for them to say it's

because the Swiss franc is highly overvalued. But intervening only when the

Swiss franc is overvalued does not ensure exiting the liquidity trap, or

achieving their price stability mandate. It's only a strategy to dampen the most

severe consequences of a swift appreciation of the Swiss franc."

     --MORE RISK-TAKING?

     With some 80% of the SNB's fixed income asset holdings AAA-rated, Kaufmann,

now an assistant professor at the University of Neuchatel and associate research

professor at the Swiss Economic Institute, Zurich, said the bank could should

also consider taking more risks.

     "The SNB tends to treat its investment strategy and its monetary policy

strategy as two independent things, and of course they aren't," he said. "If the

SNB really want to affect risk premia with their exchange rate interventions,

then they probably should buy more risky assets. But I doubt that exchange rate

interventions by the SNB can substantially influence risk premia abroad."

     Echoing calls for a comprehensive review of central bank policy in the euro

area, Kaufmann said that in the case of the SNB, "assessing the strategy every

time you take a decision is not the same as reviewing your long-term strategy. A

long-term strategy may affect people's expectations and therefore lead to a more

efficient monetary policy. By contrast, discretionary decisions lead to constant

surprises and may undermine the central bank's credibility.

     A review could, Kaufmann said, cover technical issues such as the

distinction and interaction between investment and monetary policy strategy;

whether the bank's foreign exchange interventions worked, and which channels

they think "do actually weaken the Swiss franc. Another important point would be

the relatively low price stability objective for inflation, which is one reason

why Swiss interest rates are generally lower as in other countries."

     Should the ECB and SNB stick to their current inflation-targeting

frameworks, Kaufmann concluded, "forward guidance will have a limited effect on

the economy."

     An ECB spokesman said he was not able to comment on the remarks made to MNI

by sources.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MT$$$$,MX$$$$]