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Two Cheers for the Swiss National Bank

Edwin M. Truman (Former PIIE)



The financial world is hyperventilating over the Swiss National Bank's surprise announcement that it is abandoning its policy of pegging the Swiss franc to the depreciating euro. Two cheers for Thomas Jordan and the Swiss National Bank (SNB). It was the right policy move and it reminded financial markets that the job of central banks is not always to spread foam on the runway of global finance and save investors from themselves. The SNB does not deserve a third cheer for its policy move because it was reversing a policy that was wrong when it was adopted in 2011 in an effort to keep the Swiss franc from appreciating against the euro, to the detriment of its export-dependent economy.

On January 15, Thomas Jordan, president of the Swiss National Bank, announced that the Bank was abandoning its policy of placing a ceiling (which the SNB called a floor) under the Swiss franc at €1.20 per franc. Markets, which had unwisely assumed that the SNB policy was eternal, went into a tailspin. The franc abruptly jumped to close to par with the euro. The Financial Times editorialized (January 16) that the action was "a poor advertisement for Swiss reliability." International Monetary Fund (IMF) managing director Christine Lagarde lamented: "Jordan did not contact me; I find it a bit surprising that he did not contact me. I would hope it was communicated with colleagues from other central banks—I don't know that it was" (IMF News Report, January 15, 2015).

In fact the SNB today deserves to be praised. When it finally understood that its policy was unsustainable, with international reserves approaching 100 percent of GDP and the prospect of further accumulations as the ECB contemplates adopting a belated policy of quantitative easing, it changed its policy, it bit the bullet, and it offered no free rides.

The SNB deserves praise for not telegraphing its intentions to the market. It is not a central bank's responsibility to save market participants from the consequences of their mistaken assumptions. We do not know whether the SNB alerted other central banks or governments, but we know it did not inform the IMF. Why should it inform the IMF? Did it have a need to know? What was it going to do with the advance information? Lagarde and IMF staff should long ago have advised the SNB to abandon its policy and in its surveillance role have warned the international community that the peg should not be forever. They should be cheering not criticizing. 

The SNB should be excused if it kept its intentions entirely to itself. Even within the central bank community, it is very difficult to keep a secret. The SNB and the international central banking community had an example of the importance of maintaining a cloak of secrecy.

The SNB should be criticized for its adoption of its policy in the first place. The policy change was not justified by the condition of the Swiss economy. The original Swiss policy was not in the international interest. It was openly protectionist. And the IMF staff and management gave Switzerland a free ride. While the euro area was mired in crisis and recession, the Swiss economy expanded from an average growth of 1.2 percent from 2008 to 2011 to an average of 1.4 percent from 2012 to 2014. During the later period, the volume of Swiss exports increased by 2.3 percent a year, faster than real GDP. Switzerland's current account surplus, which averaged 7.3 percent of GDP from 2008 to 2011, almost doubled to an average of 13.4 percent of GDP from 2012 to 2014.

The mistake that the SNB and the Swiss authorities made was not that they were acting selfishly in 2011 and not acting in the interests of enhancing their long-run economic and financial reputation for probity, but that they failed to think about how they were going to terminate the policy if and when it became unsustainable. The market has now forced the SNB to change its policy, and the Swiss export-dependent economy itself may suffer as exports of industrial goods and farm products decline. But the fundamental mistake was not made in January 2015. It was made in September 2011.

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