June 19, 2018 / 7:23 AM / a month ago

UPDATE 1-Swiss government warns Italian worries could spark franc rise

(Rewrites, adding analysts, detail)

By John Revill

ZURICH, June 19 (Reuters) - Political uncertainty surrounding Italy's new anti-establishment government could heap renewed upward pressure on the Swiss franc and harm Switzerland's economic growth, the Swiss government warned on Tuesday.

After weakening earlier this year and breaching the symbolic 1.20 level versus the euro in mid-April, the franc has resumed its upward trajectory. The near 5 percent appreciation has been largely driven by investors seeking the safe-haven currency.

The government in Rome has made investors nervous by promising to increase spending, slash taxes and challenge European Union fiscal rules, adding to Italy's debt pile.

The Swiss government, giving its latest economic forecasts on Tuesday, warned that political uncertainty in Italy had deepened, with potentially worrying consequences for the franc.

"While the newly elected government recently reaffirmed that it does not intend to leave the monetary union, its programme, which proposes in particular expansionary fiscal policy measures implying a deterioration in the country’s budget, is creating major uncertainty," the State Secretariat for Economic Affairs (SECO) said.

"If the situation comes to a head, this could send ripples through the financial markets," it added. "It could create considerable upward pressure on the Swiss franc, bringing with it considerable repercussions for the Swiss real economy."

The Italian situation will be one of the factors the Swiss National Bank considers at its quarterly monetary policy review on Thursday.

Analysts polled by Reuters unanimously expect the SNB to keep its benchmark interest rate locked at -0.75 percent to ward off renewed interest in the franc.

"The situation did look favourable for a rate hike, but then the ECB was rather dovish in its most recent statements, there have been the troubles in Italy and the latest economic data is weakening, which at the moment don't support the case for an early interest rate hike by the SNB," said Alessandro Bee, an economist at UBS.

"It will be interesting to see what the SNB says about risks – the situation is certainly gloomier than a few months ago."

Combatting the strength of the franc has been a priority for the SNB as a more expensive franc harms Switzerland's export-reliant economy.

Political risks could even make the central bank consider lowering interest rates if the franc were to rise further.

"It would have to be an extreme situation with the franc rising for the SNB to lower interest rates further, but it is possible," said Charlotte de Montpellier, an economist at ING.

"The current situation shows why the SNB will stick to its description of the currency situation as fragile and delay its own tightening," she added. (Editing by Michael Shields)

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