Switzerland’s Central Bank Learns to Live With a Strong Franc
(Bloomberg) — The Swiss National Bank seems to have a new doctrine on how to handle the strength of the franc: pick your battles.
A central bank previously known for its aggressive tactics to contain inflows is now taking a more judicious stance. While officials still closely watch moves in the currency, they appear to prioritize orderly shifts rather than obsess over specific levels, and no longer insist that it’s overvalued — nor deploy vast sums to keep it in check.
That’s how observers characterize the SNB’s approach after almost one year of President Martin Schlegel’s reign, as the franc continues to hold close to its highest levels in a decade against the dollar and the euro. The more relaxed regime was already evolving under his predecessor, Thomas Jordan, and has withstood multiple market jolts so far.
While Donald Trump’s recent decision to slap punitive tariffs on Switzerland drove some weakness in the franc, other trade announcements from the US president this year caused spikes in a currency often seen as a haven at times of stress.
“I think it has been something that has been brewing for a long time,” said Christian Schulz, chief economist of Allianz Global Investors in Frankfurt. “FX interventions to combat short periods of rapid appreciation probably make sense. Interventions to shift the level of the currency won’t work.”
The change in attitude toward the franc aligns the SNB toward the approach of global peers, adheres more to the US Treasury’s anti-manipulation policy under Trump, and further entrenches the primacy of interest rates as the main tool of monetary policy.
Another pillar of the different approach may be a decision to communicate more with markets. Last week, Schlegel unveiled plans to release a summary of the discussion at each quarterly rate meeting with a four-week lag, starting with this month’s decision on Sept. 25.
A spokesperson for the SNB declined to comment on any potential shift in thinking among policymakers.
The central bank’s apparent change in approach on the franc was arguably overdue. It’s hard to justify constantly telling investors that they’re wrong, nor is it sustainable to keep fighting them indefinitely.
And yet, for much of this century, the central bank’s playbook featured big market interventions, including its attempt to enforce a hard cap on the franc from 2011 to 2015.
Officials then resorted to the world’s lowest interest rate at -0.75% and kept up large-scale sales of the currency while insisting that the franc was stronger than justified. They used such language in nearly every policy statement for six years until 2022.
Resurgent inflation then allowed the SNB to buy back currency and shrink its balance sheet while ending negative rates too. But with annual consumer-price growth now at 0.2%, policymakers are once again at risk of undershooting their 0-2% target range.
“The current headline inflation level historically would have implied some SNB CHF-selling,” said Meera Chandan, co-head of global FX strategy at JP Morgan Chase. “However, the SNB does appear less concerned about franc strength than in the past.”
That’s reflected in the lack of big currency sales since easing began in March 2024. Policymakers have repeatedly declined to call the franc overvalued.
While officials insist interventions remain in their toolbox, their use is now akin to a wave-breaker. For example, they cushioned the franc’s surge against the dollar after Trump’s announcement of global tariffs in April, according to estimates by UBS Group AG.
Meanwhile the SNB has leaned on cuts in borrowing costs to deter inflows, bringing its rate to zero in June.
That policy mix partly reflects the reality of a huge balance sheet that ballooned to more than 1 trillion francs ($1.26 trillion) during previous rounds of interventions. Valuation swings of such a hoard can leave the SNB vulnerable to big losses and political discomfort when it then skips payouts to government coffers. That could happen again this year.
Even at their current size of 715 billion francs, the foreign-exchange assets restrict room for maneuver.
“They don’t have the ammunition right now to work against the market,” said Michael Pfister, an FX strategist at Commerzbank.
Policy Trap
Another incentive to shift approach is renewed US pressure. This year, the Treasury put Switzerland back onto a list of countries whose foreign-exchange policies warrant close monitoring. Schlegel can’t ignore the risk of being rebranded a currency manipulator, as happened during Trump’s first term.
His own experience of confronting traders will have informed the SNB’s strategy. In a previous role before succeeding Jordan last September, he was in charge of the trading floor during the abandonment of the franc cap in 2015.
The global economic backdrop is yet another reason to act judiciously. While the worry during previous interventions was that deflation could take hold, this is now less the case, according to Maxime Botteron, an economist at UBS.
“SNB officials might have felt trapped by the emphasis they used to put on the exchange rate, because it made investors expect interventions,” he said. “Monetary policy became inflexible.”
The result for now is that franc inflows may encounter less overt resistance, so long as they aren’t abrupt. But it also means that the SNB may bring its rate, currently at zero, back to negative before long. A significant minority of forecasters expect that as soon as this year.
Still, policymakers won’t tolerate moves that threaten their inflation mandate, according to Claude Maurer, chief economist at BAK Basel Economics.
“If they are actually concerned that price stability is in danger, threats from Trump and a growing balance sheet will be the lesser evil for SNB officials,” he said.
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