Switzerland's central bank shocked financial markets by abandoning its three-year-old cap on the franc against the euro on Jan 15.
The Swiss National Bank is ready to intervene in the foreign currency market to ease monetary policy after ditching its cap on the Swiss franc earlier this month, its vice-chairman said in an interview on Tuesday.
Switzerland’s central bank shocked financial markets by abandoning its three-year-old cap on the franc against the euro on Jan. 15, a policy it later said would have cost 100 billion Swiss francs ($110.84 billion) to defend this month alone had it been maintained.
“Giving up the cap means a tightening of monetary policy. We accept this, but only up to a point. We are fundamentally prepared to intervene in the foreign exchange market,” Jean-Pierre Danthine told Swiss national daily TagesAnzeiger in an interview.
Danthine said it would take some time for the foreign exchange markets to balance out, but declined to give exact levels, saying the central bank was not only looking at the exchange rate with the euro but also with the dollar.
Asked about a new currency strategy, Danthine said Denmark’s policy of pegging the crown to the euro would not be suitable for Switzerland, but that Singapore’s system, which allows the Singapore dollar to rise or fall against the currencies of its main trading partners within an undisclosed trading band, “deserved closer examination”.
He also gave Sweden and Norway as examples of small, open economies that have fared well with a flexible exchange rate.
Danthine defended the SNB’s decision to scrap its cap on the franc, saying the risks of the policy to the economy had begun to outweigh the benefits.
“Theoretically, the balance sheet can grow endlessly,” Danthine said. “However, in this situation the SNB could – in an extreme case – be forced to bring more francs to the market than monetarily responsible.”
Danthine also cited the risk of losses on the bank’s forex reserves as a reason for abandoning the cap.
Huge losses could wipe out the SNB’s annual payout made to its biggest shareholders, Switzerland’s 26 cantons, or states, and to the federal government, he said.