BERN: Switzerland's central bank will counter any surge in an already overvalued franc should Britain vote next week to leave the European Union, SNB officials said on Thursday, leaving open the option to cut record-low rates deeper into negative territory.
As widely expected, the Swiss National Bank kept its policy rates on hold, keeping its powder dry should Brexit spark a flood of funds into the safe-haven franc.
The market gave a muted reaction to the rate decision.
Central bank Chairman Thomas Jordan said Brexit was not the SNB's base scenario, even if the prospects for such an outcome had risen of late. He told reporters central banks were holding intense exchanges on market developments ahead of the vote.
SNB board member Andrea Maechler said the SNB had a team following Brexit developments 24 hours a day.
The franc is seen as a safe currency in times of uncertainty and rising anxiety over the implications of a British exit from the EU has pushed it higher in recent weeks. On Tuesday, the franc hit a 2016 high of 1.0787 against the euro.
Goldman Sachs estimated Brexit could make the franc jump a trade-weighted 8 percent against a basket of major currencies, dealing another severe blow to the export-led Swiss economy.
"A Brexit would completely change the situation, we would have to review our forecasts for inflation and GDP growth," Jordan told a news conference.
"It is relatively difficult to give exact forecasts because we don't know what this would imply, what is the relationship between the United Kingdom and the currency union, what is the impact on the City of London and on the international markets. The SNB would have to reassess the situation."
He said it was in Switzerland's interest that Britain remains in the EU.
BREXIT WAITING GAME
Several recent opinion polls in Britain showed those who want to leave the EU in the lead, despite warnings from Prime Minister David Cameron, the Bank of England and others that Brexit could cause significant economic disruption.
The SNB uses a mixture of negative interest rates and currency purchases in an effort to weaken what it reiterated was a "significantly overvalued" franc and ease pressure on Swiss exporters.
Jordan said there was no upper limit to the extent of its currency market interventions. There were no signs so far of cash hoarding by Swiss households despite negative rates, he added.
"The risk remains that the United Kingdom will leave the European Union, and if that happens, the SNB is only going to be under more pressure," Zuercher Kantonalbank senior economist Cornelia Luchsinger said.
"With the recent market turbulence, it's very likely that the SNB has grown more aggressive with its intervention."
The SNB followed the lead of other central banks including the US Federal Reserve, which on Wednesday kept rates unchanged while acknowledging Britain's possible exit from the EU was one of the factors driving its decision.
The Bank of Japan refrained from offering additional monetary stimulus despite external headwinds and anaemic inflation, spiking the yen to a two-year high that clouds an already darkening outlook for the economy.
"We have also seen the other central banks refraining from taking action ahead of the referendum," said Maxime Botteron, an economist at Credit Suisse.
The SNB left unchanged its forecast for Swiss gross domestic product to grow this year between 1 percent and 1.5 percent.
It saw inflation this year at -0.4 percent, compared to -0.8 percent in its March forecast. For 2017, it expected inflation to return to positive territory with price growth of 0.3 percent versus 0.1 percent its March forecast.
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