SNB Committed to Defending the Franc Ceiling

on Sep 3, 2012

The Swiss National Bank (SNB) will continue to enforce the euro’s minimum exchange rate against the Swiss franc with utmost determination, the central bank’s president Thomas Jordan said on Monday (September 3), in a speech text prepared for delivery at the NZZ Capital Markets Forum in Zurich.

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“In the current situation, a further appreciation of the Swiss franc would constitute a very substantial threat to the Swiss economy, and would carry with it the risk of deflationary developments. With this in mind, we will continue to enforce the minimum exchange rate with the utmost determination, in line with our mandate,” Mr Jordan said, reiterating the Swiss central bank’s commitment to defend the franc ceiling. He also said that the economic uncertainty in the Eurozone is of great concern for Switzerland, causing the SNB to act act resolutely to dampen the negative implications for the country from the neighbouring Eurozone’s economic crisis.

!m[](/uploads/story/339/thumbs/pic1_inline.png)The SNB’s continuing policy of purchasing euros in unlimited quantities to ensure that the euro would always be worth at least Sfr1.20 is generally considered one of the world’s boldest foreign exchange policies. Active from September 6 last year, following record highs for the Swiss currency against both the euro and the dollar, the tactic is aimed at preventing investors fleeing the euro from driving up the safe-haven franc and crushing the country’s export sector. Although considered controversial, the currency policy has thus far proved successful with the Swiss central bank not for many months now needing to intervene to any extent in currency markets to prevent the euro/franc cross-rate from falling below the targeted minimum. Notwithstanding the success of the SNB’s bold strategy, a year down the track some analysts are warning that the policy poses growing risks to Switzerland’s economy. Strategists fear that the central bank’s money-printing risks igniting a domestic asset-price bubble. The SNB could also suffer losses on its holdings of the troubled euro, according to analysts. Daragh Maher, a strategist at Britain’s HSBC (LON:HSBA), observed that the Swiss central bank’s currency policy, which has led to a massive surge in its foreign exchange reserves, to Sfr406 billion (£268 billion) in July from Sfr365 billion (£241 billion) the month before, has “repercussions” and could stoke an “asset-price bubble” in the Alpine state. “Success comes at what price? One is asset-price inflation. Another is how popular is it elsewhere? It is fine Switzerland intervening, but it has repercussions,” Mr Maher opined.
Last week, SNB president Jordan said that he would not pursue the franc ceiling “for eternity”, but stressed that the central bank was nowhere near a shift in policy. Asked if the SNB has an exit scenario, he said: “At present, this isn’t under debate; it is the right monetary policy for the challenges we are currently facing.”


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