IMD International

Swiss National Bank abandons currency policy, loses credibility

IMD Professor Reacts: Arturo Bris on the Swiss National Bank announcement to end currency peg to the euro

January 15, 2015

The surprising news coming from the Swiss National Bank (SNB) this morning is a result of the inability of Swiss monetary authorities to support the Swiss franc against the euro. There are several factors that make today's announcement truly surprising, with unintended consequences in stock and currency markets.

Firstly, the SNB should have abandoned its peg way earlier. The rise in the strength of the Swiss franc in recent months has been a result of the weakness of neighboring countries' currencies rather than a significant improvement in the Swiss economy.

However, we have had worse news coming from the Eurozone in the past few weeks (the renewed Grexit threat, the rise of populist movements across Europe, the willingness of the UK to leave the EU, geopolitical problems, and energy prices).

But the SNB's decision was not triggered by those factors. It was set in motion by the EU Advocate General's statement yesterday that the ECB's Outright Monetary Transactions (OMTs) are compatible with EU law. That announcement clears the way for a massive quantitative easing (QE) program by the ECB engineered through purchases of high-quality bonds.

In such a scenario, the SNB would be no longer able to support an exchange rate of 1.2 against the euro. Therefore, the Swiss monetary authorities have abandoned the peg rather than fighting markets. Why has the central bank waited for so long if it had foreseen its own inability to support the currency?

Second, I am surprised that, indirectly, the SNB is coming to the rescue of a suffering Europe. ECB officials could not have received better news today than what was announced in Zurich. But what about the Swiss domestic economy and stock markets – especially companies whose main business is exporting to the Euro area? Has the SNB done the correct thing? That remains to be seen.

Finally, I would have been less surprised by an announcement in the opposite direction. If the SNB had declared its commitment to maintaining the exchange rate at 1.2, markets would have possibly believed it. In other words, among the three alternatives (doing nothing, reiterating commitment to the current policy, or abandoning the peg) the SNB has chosen the worst possible one.

When the SNB first declared its intention to maintain the level of the Swiss franc to the Euro at 1.20 in September 2011, it did not need to spend very much to buy Euros. Markets had faith in the measures because of the strong reputation of the SNB and the prophecy became self-fulfilling. 

The SNB has lost a lot of its strong credibility which took many years to build.

Arturo Bris is Professor of Finance at IMD and directs the IMD World Competitiveness Center.

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