Asia Economy

Swiss Central Bank Faces Tough Choices at Meeting: Analysts

As the Swiss National Bank (SNB) gets ready to meet on Wednesday, a number of analysts say the central bank has few choices to try and stem the franc's recent rise.

Swiss Francs
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"(They) can't stave off the flood of demand for Swiss francs if markets continue to deteriorate," Brian Dolan, Chief Currency Strategist at told CNBC on Wednesday ahead of the meeting.

The currency has surged some 20 percent against the U.S. dollar in the last 6 months and around 13 percent against the euro. Those sharp gains have hurt Swiss exporters and threatened to tip the country into recession. It's also increased speculation the SNB may peg it's currency to the euro, given that interest rates are already near zero.

"That is my least preferred option for them to take," Dolan said, arguing once the currency has been pegged, there would be no looking back. "That obligates them to use interest rates or direct market intervention to maintain whatever peg they decide to set."

BNP Paribas also thinks such direct intervention would fail to address the root cause of the franc's gains - a surge in Swiss bank deposits during global recessions. BNP points out the recent upswing in the currency started in late 2008, immediately after the collapse of Lehman Brothers. A similar trend occured between 1990 and 2001.

"The increase from 1990 led to a particularly sharp CHF appreciation. Interestingly, all three cases of surges in Swiss savings deposits have occurred during U.S. recessions," BNP said in a report.

According to's Dolan, a better way to tackle the problem would be to directly target these deposits with a punitive tax. 

"A more likely option they're likely to pursue will be raising a tax on Swiss deposits, basically calling for negative interest rates. And that will make it a little less attractive to hold Swiss francs," he said.

BNP Paribas points out that if history is any guide, this too may not work. Between 1972 and 1978, Switzerland imposed taxes on non-resident deposits equivalent to an effective tax of 40 percent per annum but the Swiss franc soared 78 percent against the euro during that period.

"The conclusion is that the SNB will likely struggle to reverse the current bout of Swiss franc strength given the market preference for the Swiss franc as a safe haven from economic and market conditions in both the U.S. and the eurozone," BNP Paribas said.

Dolan agrees that trend will persist as long as global uncertainties remain.

"The best we can hope for, the best they can hope for, is some stabilization in global risk assets. And that will lessen the demand for Swiss franc on its own," he said.