* SNB’s Jordan: franc still significantly overvalued
* Two-pillar policy to weaken franc of negative interest rates, intervention
* SNB chairman says negative interest rates won’t last forever
By John Miller
ZURICH, Nov 3 (Reuters) - Switzerland’s currency remains “significantly overvalued”, and the Swiss National Bank will rely on negative interest rates and a willingness to intervene to drive down its value, the central bank’s chairman said on Tuesday.
“Our current monetary policy is based on two pillars,” Thomas Jordan said in a speech to the Geneva Financial Center, the umbrella association of the region’s financial sector, according to a copy of his prepared remarks.
“The first pillar is the negative interest rate on sight deposits at the SNB. The second pillar is our willingness to intervene on the foreign exchange market as required.”
Switzerland’s export-heavy economy had to absorb a surge in the franc’s value that began on Jan. 15, when the SNB abandoned its cap on the value of the franc of 1.20 francs per euro. The SNB said the cap had grown too expensive to defend.
Since then, the franc has weakened slowly. It traded at around 1.086 per euro on Tuesday.
To weaken the franc, the SNB for months has kept its target range for three-month Libor at -1.25 to -0.25 percent. It has also levied a charge on some deposits that banks and other institutions hold at the central bank.
In June, the SNB confirmed publicly that it had intervened in foreign exchange markets, something Jordan said remains part of the policy as long as the franc remains overvalued.
“Due to the safe-haven status of the Swiss franc, the SNB has been active on the foreign exchange market,” he said.
Some have questioned why the SNB has levied charges on most sight deposits including those of domestic Swiss pension funds, whose returns have been hurt, rather than targeting holdings parked there by foreign institutions seeking the franc’s safety.
In his speech, Jordan countered that Switzerland had pursued that course in the 1970s, to little or even negative effect.
“These measures and restrictions - directly targeted at foreign customers - were, however, not very effective since too many loopholes existed,” he said. “Moreover, they created serious distortions and had a negative impact on Switzerland’s position as a financial centre and on its international wealth management.”
The SNB’s current policy, however painful in the short term, is more effective, he said. It affects overall macroeconomic conditions without loopholes and does not interfere with trading freedom.
While Jordan told the group that continued reliance on tools to ease upward pressure on the franc remained part of the SNB’s arsenal, he added it wouldn’t always be so.
“It is ... also important to recognize that negative interest rates are a response to the current international environment and do not represent a long-term equilibrium,” he said. (Reporting by John Miller)