Weakening franc breaks symbolic mark

The SNB conducts a difficult balancing act to stabilise the national economy. Keystone

Despite the Swiss franc breaking through the threshold CHF1.20 exchange rate, the likelihood remains slim that Switzerland’s central bank will alter monetary policy any time soon.

This content was published on April 19, 2018 minutes

On Thursday morning the euro temporarily cost CHF1.20025 before slipping back to CHF1.99. Earlier this year, the euro was trading at well under CHF1.150. The greater the number of francs needed to buy another currency signals a weaker franc, and vice versa if the exchange rate declines.

But central bank chairman Thomas Jordan told Bloomberg on Thursday that he is in "no hurry" to adjust a monetary policy that includes negative interest rates. Jordan pointed out that the global economy was still in a "delicate situation" and that the franc maintains its status as a safe haven currency.

The magic CHF1.20 barrier was the minimum rate defended by Swiss National BankExternal link (SNB) until it abandoned its policy in January 2015. The Swiss export and the domestic tourism industries want the franc to weaken to allow goods to be sold more competitively abroad and give visitors more spending power when they come to the country. 

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The SNB pumped hundreds of millions of francs into defending its CHF1.20 exchange rate by buying foreign currency denominated assets. The central bank also reduced interest rates to a negative target rate of -0.75%, reducing the franc’s attractiveness as a safe haven currency for foreign investors.

Volatile markets

This second policy came with negative side-effects, such as inflating property prices and reducing the return on some traditional financial investments. The SNB therefore has a motive to normalise interest rates, but this has a down side – it could strengthen the franc once again.

But after its monetary policy meeting in March the SNB said market conditions remain too volatile to contemplate an interest rate rise.

“The Swiss franc remains highly valued. The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly,” the SNB stated. “The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential.”

Analysts, such as the KOF Swiss economic instituteExternal link which published its latest forecast on March 28, do not expect Swiss interest rates to rise this year. This is partly because instability created by national elections, such as Italy, and trade disputes between the United States and various countries could see a flight of capital to the franc at any moment. 

Another reason is that the European Central Bank (ECB) continues to print large volumes of euros to buy bonds from economically weaker member states. While the ECB’s quantitative easing programme has been reduced this year, experts think the SNB will wait for it to end completely before thinking of an interest rate rise.

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