Is Switzerland a currency manipulator?

Swiss National Bank boss Thomas Jordan. © Keystone / Eq Images / Christian Pfander

The US move to brand Switzerland a currency manipulator has been met with a chorus of denials by the Swiss National Bank. Monetary policy analyst Fabio Canetg explains what the decision means.

Switzerland and Vietnam were both placed on the US list of currency manipulators this week following a report by the Department of the Treasury, accusing them of overly interfering in exchange markets. The Swiss National Bank (SNB) has denied this: its actions do not give Switzerland an unfair competitive advantage, it says.

SWI swissinfo.ch: Why is the SNB so aggressive in its purchasing of foreign currencies?

Fabio Canetg: In times of crisis, investors tend to heavily buy into the stable Swiss franc. This means it increases in value, which makes Swiss exports more expensive. At the same time, goods and services from abroad become cheaper in Switzerland.

Both effects are a headache for the National Bank, whose mandate is to maintain the stability both of the Swiss economy and of domestic prices. As a result, the SNB buys up foreign currencies to prevent the appreciation of the franc becoming too severe.

The US report should not — and will not — affect the @SNB_BNS_enExternal link's monetary policy. The #SNBExternal link's domestic mandate and its limited capacity for interest rate cuts (at a policy rate of -0.75%) require FX interventions. https://t.co/CKvE144uW0External link

— Fabio Canetg (@fabiocanetg) December 16, 2020External link

SWI: Why has the US now declared Switzerland a currency manipulator?

F.C.: The US tolerates interventions in the currency markets when they don’t go beyond 2% of a country’s Gross Domestic Product. In the Swiss case, this means a limit of some CHF15 billion ($16.97 billion) each year. In 2020, the National Bank clearly went beyond this, intervening to the tune of over CHF90 billion. And because Switzerland is also a clear net exporter to the US, Washington decided to label it a currency manipulator.

SWI: What’s behind this US strategy?

F.C.: The US criteria are politically motivated. They were initially introduced as a reaction to China keeping its currency artificially low – with the aim of selling its products cheaper on the US market. But the actions of the SNB, on the other hand, are not done with this goal of making Swiss exports cheaper abroad. The SNB simply wants to prevent a situation where Swiss products become too expensive.

SWI: Was the SNB prepared for this?

F.C.: Yes, the SNB was quite ready for this report. Shortly before it came out, the SNB had published a press release in which it pledged to continue to remain active on the currency markets.

SWI: What would happen if the SNB were to scale back its currency purchases?

F.C.: For around a year now, the inflation rate in Switzerland has been below zero – out of the target range determined by the SNB. The bank thus also has to watch out that prices don’t sink even lower. And because cutting the current headline interest rate of -0.75% wouldn’t have any effect, buying foreign currencies is the only instrument left to it. The SNB is not going to stop doing this.

SWI: Are there any alternative strategies the SNB could consider?

F.C.: No. In the short term the SNB can only hold prices stable by confirming its willingness to invest in exchange markets when necessary. Otherwise, there’s a risk of deflation, that is, a sustained period of falling prices.

In the medium term it could, like the US Federal Reserve and the European Central Bank, consider a fundamental shift in monetary policy. A higher inflation target, for example, would reduce the ongoing pressure on the franc.

SWI: What’s the worst-case scenario for Switzerland?

F.C.: It’s not clear. As a first step, bilateral talks will be held between the two countries. US law then foresees measures to be taken against Switzerland: but the form these measures will take will depend on how well Switzerland can explain its action on the currency markets. Here, the country has the backing of the Bank for International Settlements (BIS), the “central bank of central banks”, whose chairman told the Neue Zürcher Zeitung newspaper in October that Switzerland is not a currency manipulator.

SWI: How serious is the problem of the strong Swiss franc?

F.C.: This is still a concern, because it drives up the price of Swiss exports and means the inflation rate at home stays low – which slows down the economic development of the country. The SNB regularly confirms its readiness to act in currency markets; but in the past few months, it has not done anything else to try to weaken the franc.

Monetary policy specialist Canetg is a research associate at the Swiss National Bank’s Gerzensee Study Center, an institute that runs training and further education courses for central bank employees as well as doctoral students in political economy.