Line chart of Franc per euro showing Swiss franc hit a five-year high in May

Switzerland ready to hold down franc with sharper interventions

The Swiss National Bank said it was ready to accelerate huge interventions in foreign currency markets as successive bouts of economic uncertainty have placed upward pressure on the franc.

Despite a smaller than expected hit to Switzerland’s economy from the coronavirus pandemic in the first half of the year — GDP contracted just 5 per cent — the bank said it intended to pursue its ultra-expansionary monetary policy for the foreseeable future.

“The SNB’s expansionary monetary policy is necessary to ensure appropriate monetary conditions in Switzerland and to stabilise economic activity and price developments,” the central bank said in a statement.

“In view of the fact that the Swiss franc is still highly valued, the SNB remains willing to intervene more strongly in the foreign exchange market.”

Switzerland’s currency is considered by many investors to be a haven and typically appreciates strongly during times of global strife.

Analysts at Credit Suisse this week estimated the SNB has sold more than $98bn worth of Swiss francs in the first half of this year alone — the central bank’s most aggressive effort to suppress Switzerland’s currency.

The franc rose to a five-year high against the euro in May but has weakened somewhat since then. One euro recently fetched SFr1.078.

The SNB said it would more regularly publish data on its interventions, with monthly updates to data on monetary-policy related transactions.

The bank’s interventions in currency markets have been a cause of international tension: the US has repeatedly threatened to designate Switzerland a currency manipulator. The bank was added to a “watchlist” by the US Treasury in January.

The SNB said earlier this year that market interventions would be its main tool in the near future to try and control inflationary forces on the franc.

Policymakers also on Thursday held the central bank’s main interest rates steady at minus 0.75 per cent. Interest rates have been negative in Switzerland since 2014. They remain the lowest in the world. There is rising political disquiet in the wealthy alpine country about the effect that holding rates below zero for so long may be having on the Swiss economy: pensions funds and savers have been big losers.

The bank’s unorthodox policies have also led to a massive swelling in the size of its balance sheet: the SNB is one of the world’s largest investors, with a portfolio of stocks and bonds larger than that of sovereign wealth funds run by oil and gas-rich states such as Qatar and Abu Dhabi.

The SNB’s holding of foreign currency equities has at times driven bumper paper profits — although officials at the institution stress the chief criteria of their investments is liquidity, and they have no direct interest in making money.

The SNB has repeatedly warned of the dangers of allowing an uncontrolled appreciation of the franc. It does not target a specific price range for the currency, but instead aims to prevent any rapid rise in its value.

A sharp rise in value would be devastating for Switzerland’s large manufacturing and export-oriented industries, the SNB believes.

The franc has been under consistent upward pressure thanks to Switzerland’s status as a safe haven for investors in times of financial stress, and ultra-low rates elsewhere across the developed world, particularly in the eurozone and the US.

The SNB said that while there remained a high degree of uncertainty over the economic outlook, it expected a “strong” recovery in the third quarter for Switzerland.

“The positive development is likely to continue in 2021,” it added.

“In its baseline scenario for the global economy, the SNB anticipates that it will be possible to keep the pandemic under control without a renewed serious impairment of economic activity. The economic recovery should thus continue.”