SNB comment on pulling the minimum exchange rate in EURCHF
The opening comments in the SNB's annual report gives some further thoughts from the SNB over pulling the 1.20 EURCHF floor
Over the course of the year, there were growing signs of a divergence between
the monetary policies in the US and the euro area. While the minimum
exchange rate did not come under pressure initially, this changed in the final
weeks of the year. On 18 December, the SNB announced the introduction
of negative interest on sight deposit account balances held at the SNB by
banks and other financial market participants. The aim was to increase
the interest rate differential to other currencies, thereby rendering Swiss franc
investments less attractive and supporting the enforcement of the minimum
exchange rate. In addition, the SNB expanded the target range for the three month
Libor into negative territory.
After a brief period of calm, pressure on the minimum exchange rate
increased very significantly during the first half of January 2015. Overall,
the euro weakened once again, and it became evident that the minimum
exchange rate could only be enforced through ongoing intervention in the
foreign exchange market. This would have resulted in an uncontrollable
expansion of the balance sheet, to a level that might even have been several
times Swiss GDP. At an extraordinary monetary policy meeting, the SNB
concluded that a minimum exchange rate of CHF 1.20 per euro had become
unsustainable, and was therefore no longer justified from a monetary policy
point of view. On 15 January 2015, the SNB therefore decided to discontinue
the EUR / CHF minimum exchange rate. At the same time, it lowered the
interest rate on sight deposit account balances to - 0.75% as of 22 January
2015, and moved the target range for the three-month Libor downwards by
0.5 percentage points to between - 1.25% and - 0.25%.
Had it maintained the minimum exchange rate, the exceptional increase
in foreign currency purchases would have meant that the SNB risked losing
control of its balance sheet and, as a result, of monetary conditions, in
the long term. Against the backdrop of changing international conditions,
enforcement of the minimum exchange rate was no longer justifiable.
Had the SNB maintained the EUR / CHF minimum exchange rate despite this
realisation, it would have put the long-term fulfilment of its mandate at risk.
Once the SNB had reached this conclusion, the timing of the discontinuation
had to be addressed. Swift action was necessary. Waiting and continuing
to intervene in the foreign exchange market would have increased pressure
on the minimum exchange rate because of the speculation that would have
ensued. In the event of a later discontinuation of the minimum exchange rate
following substantial further interventions, the turmoil on the financial
markets would not have been any less severe and the losses on the SNB's
balance sheet would have been exorbitant. The costs of maintaining the
minimum exchange rate of CHF 1.20 per euro would have been out of all
proportion to the benefits for the economy
While the market is not due any help from central banks, I feel the SNB still had a duty, if only to overall financial stability, to manage the cap pull much better than it did. Noting that the market was going to blow up either way makes the decision not to manage it better even worse.
If you're short of toilet paper the full report is here
