Swiss National Bank Claims Currency Interventions are “Essential”

On the Watchlist

                Switzerland was added to the infamous watchlist of countries that are suspected of manipulating exchange rate of its currencies earlier this year. The watchlist is run by the US Treasury. US believes those countries use measures to trigger good exchange rate of its currencies that will help them become more competitive on global forex market. Switzerland ended up on the watchlist due to high surplus on the accounts and bilateral trade balance. Such evidence is a result of mainly Swiss National Banks’ interventions on foreign exchange rate market.

Interventions Are Essential

                A few months after Switzerland was added to the watchlist by the US, the Swiss National Bank President Thomas Jordan riposted to this fact during a lecture for the International Monetary Fund. Jordan referred to the SNB’s interventions and accusations that they might be a source of manipulating the exchange rate of CHF. “Even though we still have scope for further interest-rate cuts, the fact remains that one cannot lower interest rates indefinitely,” he stated. “For this reason, interventions in the foreign exchange market, in which we buy foreign currencies and sell Swiss francs, also play a central role in our policy mix,” added Jordan.

Preventing Too Strong CHF

                Swiss monetary policy for long time now has been focused on preventing the Swiss franc exchange rate from getting to high. Strong Swiss franc is not good for the economy, neither for the inflation goal, that is very important to the SNB. In difficult times on the global financial markets many investors decide to buy Swiss francs, which make its exchange rate hit new record level. Latest stressful situation with the Covid-19 also cause higher price of CHF. Interventions on the foreign currencies market made by the SNB are aimed at making CHF exchange rate weaker. Even imposing the lowest interest rates in the world, minus 0.75%, and keeping them for many years, didn’t quite work in preventing CHF exchange rate from getting too strong. Now CHF is a third stronger versus the euro than 10 years ago, and its exchange rate continues to rise. Cutting further interest rates is not an option as it would distort the economy and cause troubles for those saving money on accounts, which in result would further burden Swiss commercial banks, already complaining at the SNB’s policy that cause them lower profits.

Not Worried

                The Swiss National Bank official have suggested publicly a few times that being on the US watchlist does not make them worried, claiming that US understand their position. The IMF itself last year called Swiss currency actions “appropriate”. During his lecture Jordan also said that: “Our experience shows that foreign exchange market interventions and the negative interest rate are essential for a small open economy with a safe-haven currency in a global low interest rate environment,” He further added that: “The combination of these two monetary policy instruments is more effective and results in fewer undesirable side effects overall than concentrating on just one of them.”