Swiss Central Bank to Wage War Against Strong Franc

August 3, 2011

In 37 years as a central banker, I cannot recall more strident language in a central bank statement than what the Swiss National Bank released today.

  • The franc is called “massively overvalued at present.”
  • Officials “will not tolerate” a continual tightening of monetary conditions caused by the rising franc.
  • They promise to “significantly increase the supply of liquidity to the Swiss franc money market over the next few days.”  The objective is a 167% jump in sight deposits to CHF 80 billion.
  • Today’s action was taken because the outlook for the Swiss economy “has deteriorated substantially” since the last quarterly review released in mid-June.

Japan popularized the acronym ZIRP (zero interest rate policy) on and off but mostly on since 1999.  Besides, flooding the market with franc liquidity, the Swiss central bank effectively has established ZIRP, “aiming for a 3-month Libor as close to zero as possible, narrowing the target range for the 3-month Libor from 0.00-0.75% to 0.00-0.25%.”  Before the Great Recession, the target band and point target had been 2.25-3.25% and 2.75%, respectively.  Rate cuts were implemented of 25 basis points in October 2008 followed by 150 bps in two steps during November 2008, 50 bps in December 2008, and 25 bps in March 2009.  There had been no changes since then and no released policy changes out of the normally scheduled quarterly sequence until now. 

Today’s action constitutes crisis management and contrasts with the calm demeanor of the mid-June Swiss policy report.  That review had maintained a 2011 growth projection of about 2% and raised predicted on-year CPI inflation for 3Q11, 4Q11 and 1Q12.  The assumed inflation path thereafter was somewhat lower than stated in the March 2011 review with a new trough in 2Q12 of 0.9% and readings above 1.9%, that is above target, beginning at the end of 2013.  As Swiss officials often do, the statement in June had warned that “the current expansionary monetary policy cannot be maintained over the whole forecast horizon without compromising price stability in the long run.”  Why the sudden change of heart just seven weeks later?  Well, besides tighter domestic monetary conditions that has been unintended, “the global economic outlook has worsened.” 

Early in the Great Recession, Swiss officials conducted heavy currency market intervention, selling francs against euros, in an effort to prevent the franc from advancing beyond 1.50 per euro.  That attempt failed miserably to quell upward bidding for francs, the king of hedges against risk, and was abandoned after a couple of quarters.  Today’s statement is noteworthy in its omission of intervention language, although officials conclude that they are prepared to “take further measures against the strength of the Swiss franc if necessary.”  In the meantime, they will monitor developments closely surrounding the franc to see if this switch in policy tactics proves more successful than plain vanilla intervention.  Against the backdrop of ZIRP, it should be noted that the yen continues to hover close to record highs against the dollar, but Japan’s currency has not experienced the kind of relentless appreciation over the past 12 months that the franc has.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: ,


Comments are closed.