Reaction to the Swiss National Bank’s (SNB) scrapping of its cap on the value of the Swiss franc has been overdone, the bank’s president Thomas Jordan has said in a newspaper interview.
“We see significant excesses in current exchange rates,” he told the Saturday editions of the Neue Zürcher Zeitung and Le Temps, adding that the bank had been aware that its shock move could have a major impact, and it could take some time for markets to find equilibrium.
The SNB had capped the value of the franc at 1.20 to the euro in September 2011 to stop the Swiss economy being unbalanced by funds seeking shelter from the global financial crisis.
But the policy became a virtual peg of the franc’s value to that of the ever-weakening euro. The European Central Bank may announce moves to further weaken the euro next week, which would have compelled the SNB to buy up more euros to keep the franc weakening at the same pace.
Jordan said the SNB had become persuaded over the past few days that increasingly divergent monetary policies would make it impossible to continue with the franc cap.
“Intervention can be justified by the economic interests that need to be defended. If the goal is no longer sustainable and justified, we cannot continue. That’s the point we reached.”
The conditions for abandoning the cap had been discussed for a long time. One was if diverging monetary policies required increased interventions to support the cap, which had happened over the past two weeks, Jordan said.
“If the SNB had continued with its policy, it risked losing control of long-term monetary policy.”
He said he had been aware that the sudden move would put Switzerland’s economy in a more difficult position.
“But it’s important that the economy does not over-react and analyses the new situation in an in-depth way. You have to remember that the cap had been an exceptional and temporary measure since the start. It was going to have to be abandoned at some point.”
Continuing with an unsustainable defence of the cap would have put the bank’s credibility into question, so it was better to take the criticism that he was now hearing, Jordan said.
His deputy Jean-Pierre Danthine has also been under fire, having reiterated the SNB’s staunch support for the policy in a television interview about 60 hours before it was scrapped.
“In a case like this, the communication cannot be changed before the decision is made public,” Jordan said.
He also dismissed accusations that the surprise decision had tarnished the SNB’s credibility.
“The National Bank is credible if it takes those decisions that are necessary in the middle and long term. Had it delayed the decision – despite believing that maintaining the cap was no longer sustainable – then that would have damaged its credibility,” he said.
“I am completely aware that the lifting of the minimum exchange rate is leading to painful consequences and discontent for many people. We now have to explain why this action was unavoidable and had to be taken.”