Swiss National Bank Removes Cap on CHF/EUR Cross Rate

January 15, 2015

After the central bank had fallen to virtually zero, SNB officials on September 6, 2011 imposed a ceiling on the franc’s cross rate of 1.2000 per euro, which had been maintained until now through threatened and actual unlimited intervention.  That subordination of monetary policy to an exchange rate target was ended today for a variety of reasons given in a released statement.

  1. Intervention had become very heavy and costly, and it was bloating the SNB balance sheet more than desired.
  2. The Swiss franc is not considered to be highly overvalued now as it had become in 2011.  The cap gave Swiss businesses breathing room to adapt to the reality of a pricey franc.  Nonetheless, in quarterly policy review after quarterly review, SNB officials maintained the view that the franc is likely to decline against the euro in the future.  This never happened, and today’s statement notes that the franc’s overvaluation has lessened, not disappeared.
  3. The euro, which traded near $1.40 in May 2014, has been weakening subsequently, thus causing the franc to fall against the dollar, too.
  4. An inflationary hangover when Swiss central bank officials had similarly shadowed the mark in the early 1980s likely influenced the current leadership, which didn’t want to experience that kind of aftermath.  Better to cut bait on the exchange rate target now than wait too long before doing so.

Swiss officials correctly anticipated that the franc would appreciate sharply initially on today’s policy change.  To guard against an excessive tightening of Swiss monetary conditions, two other steps were taken.  First, the 3-month Libor target to a range of -1.25% to -0.25%, centered on a point estimate of -0.75%, from -0.75% to +0.25%.  Secondly, a role for future intervention was claimed: “The SNB will continue to take account of the exchange rate situation in formulating its
monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.”

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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