Swiss Franc: Possible Policy Changes

The Swiss franc slipped to its lowest level in two years on May 22, after Thomas Jordan, governor of the Swiss National Bank (SNB), spoke of further action to weaken the currency and tackle deflation. Its decline also reflected speculation regarding future US monetary policy trends, as an early “tapering” in quantitative easing would reduce liquidity globally. Proposals to kick-start the Swiss economy include the imposition of negative interest rates, a policy that has curbed speculative capital inflows in Denmark, and a reduction in the exchange rate ceiling, currently set at Swfr1.20 per euro. Arguably, charging banks to park money with the SNB may take the steam out of the overheating housing sector, as the additional cost could be reflected in more expensive mortgages. Yet intervention of any sort has risks and currency manipulation caused foreign exchange reserves to bloat from under US$100bn at the end of 2010 to more than US$470bn. Obviously, a buffer is needed in any economy to insure against occasional financial turbulence, but an amount of over 70% of GDP entails a significant opportunity cost. Reserves, while highly liquid, offer relatively low returns and expose a country to future movement in exchange rates. In addition, they could lead to potential currency distortions should policymakers decide to unwind FX positions in the future. Growth in the Swiss economy rose to 0.6% (q-o-q) in Q1, but may slow in Q2.

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