Zero Tolerance from SNB

WOW. I always wondered how a pissed off Swiss banker would behave. Now I know.

The SNB is pissed off. It had it with the world trying to use the Swiss Franc as a safe haven.  From now on the Swiss Franc will stay at least at 1.2 against the EURO. And the SNB will do anything as it can no longer tolerate the current status. The statement here:

Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro
The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.
The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.
Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.”

I guess the SNB did not appreciate the vote of confidence the Swiss economy received from the global investor community. The message is clear and loud and markets took immediate notice and action.  Even the ECB had something to say:

“Statement of the Governing Council of the ECB on the decision of the Swiss National Bank

The Governing Council of the European Central Bank has been informed by the Swiss National Bank about its decision to “no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20.”

The Governing Council takes note of this decision, which has been taken by the Swiss National Bank under its responsibility.”

I do not know how it looks to you but ECB does not seem too happy. It seems that everyone, including myself has a problem with the choice of words by the SNB. In particular this one: tolerate.

What is there to tolerate in a flexible free market exchange rate regime? Nothing. So, the SNB comes out guns blazing saying enough is enough and showing determination to “buy foreign currency in unlimited quantities” in order to keep its currency weaker.  In the words of a famous song “the SNB is turning Chinese/is turning Chinese” with its monetary policy.
Unfortunately small open economies and fixed exchange rates to not live happily ever after.  All SNB had to was to just call the friends at BIS for their 2005 series on :”Foreign exchange market intervention in emerging markets: motives, techniques and implications”.

It would have been clear to them that: “There are several reasons why developed countries no longer actively intervene. One is that research and experience suggest that the instrument is only effective (at least beyond the very short term) if seen as foreshadowing interest rate or other policy adjustments. Without a durable and independent impact on the nominal exchange rate, intervention is seen as having no lasting power to influence the real exchange rate and thus competitive conditions for the tradable sector. A second reason is that large-scale intervention can undermine the stance of monetary policy. A third reason is that private financial markets have enough capacity to absorb and manage shocks – so that there is no need to “guide” the exchange rate.”

Maybe in the short term Swiss Franc appreciation would have dented economic growth for Switzerland. However, trying to correct this by imposing a fixed exchange rate regime will certainly lead long term structural problems in the Swiss economy including permanent lower growth path.

 

 

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