The Swiss National Bank (SNBN)’s cap on the franc is essential given that there is no threat of inflation, Vice President Jean-Pierre Danthine said.
“Clearly there’s no inflation risk,” Danthine said during a speech at a business event in Morges, Switzerland. He termed the cap of 1.20 per euro an “absolute necessity.”
The SNB set a cap of 1.20 per euro on the franc in 2011 and cut its benchmark rate to zero to shield the economy from deflation and a recession. Although the euro area is its biggest trading partner, Switzerland has managed to avoid the recession that has befallen the neighboring bloc.
“We consider that in a situation of normalization, the franc should depreciate,” he said.
The SNB has seen its foreign-currency holdings balloon as a result of its campaign to defend the ceiling. Last year, it spent 188 billion francs ($198 billion) on foreign currencies, up 10 times from 2011. It holds nearly half of its reserves in euros.
Danthine said there is no limit as to how far the SNB could expand its balance sheet. Also, the dictates of monetary policy come before any drawing-down of the balance sheet, he said.
“If we really want to reduce the balance sheet long-term, we have to resell that forex,” Danthine said. “But we can only do that if monetary policy allows it.”
The SNB can also absorb liquidity quickly via issuance of its own debt, so-called SNB bills, he said.
The SNB expects growth of 1 percent to 1.5 percent this year. At its most recent policy review nearly two weeks ago, the SNB warned of the risks stemming from the euro area. It stands ready to take further steps to shield the economy if necessary.
At its annual review last week, the International Monetary Fund said a tax on excess reserves held by commercial banks with the central bank could be a step taken if the franc faces severe appreciation pressure again.
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