SNB to Stuck with Its Policy And May Expand Its Balance Sheet

Big Balance, No Problem

                The Swiss National Bank will expand further its balance sheet if needed, as per declaration of its chairman of the board Thomas Jordan. “A big balance sheet is per se no problem. We can expand the balance sheet further, if monetary policy so requires,” Jordan commented to the Neue Zürcher Zeitung newspaper. The reason for that is still very high exchange rate of Swiss franc and inflation below zero, according to Jordan. But Jordan claim interventions are still made only when needed. Additionally, he refused to focus the monetary policy only on the exchange rate of CHF, claiming there is still a lot of slack left in the economy: “It would be completely premature to begin shrinking the balance sheet and tightening monetary conditions.” He added that: “It would be wrong to signal to the world now that the SNB will be the first central bank to usher in a restrictive policy.”

What About Inflation?

                The inflation is just below zero and Jordan said that he prefers to stabilize prices at maximum rate of 2%, without having to accept a rate of more than this threshold as US central bank did. “History has taught us a lesson: A recession is most likely if inflation gets out of control and measures are needed to fight it” – he commented.  Jordan also thinks there is small risk that inflation would go rapidly higher, even though it has recently turned positive. Swiss labour market and production capacities still have space to grow, and the economy is not overheated, which means inflation can stay under control.

Necessary measures to control the low Swiss franc exchange rate

                When speaking to Tele Zurich’s Talk Taeglich programme Jordan also offered his comments on the record minus interest rates, claiming they are absolutely necessary in the current environment. “Our monetary policy is appropriate because we still have very low inflation, the franc is very strong and that tends to put pressure on inflation,” he stated, adding that the board of the SNB sees no reason to change its ultra-loose monetary policy. The change of policy with higher rates would definitely mean the stronger exchange rate of CHF, as Jordan says: “You have to think...what would happen if the SNB were to raise interest rates now? Then we would have a much stronger franc, we would have negative inflation, and I don’t think that would benefit anyone.”

Policy of the SNB to ensure a good EUR-CHF exchange rate

                The ultra-loose monetary policy with interest rates at minus 0.75% has been in force since 2015. The bank has been also very active on the foreign exchange market. In 2020 alone it spent 110 billion Swiss francs (around $122.86 billion as per average exchange rate) on foreign currencies to stop CHF from getting even stronger. Current holdings of foreign exchange of the SNB are at CHF900 billion ($1.1 trillion) after long-running programme of interventions on the foreign currencies market.