SNB’s Zurbruegg Says Franc Celing Is an Extreme Measure

Swiss National Bank Governing Board member Fritz Zurbruegg said the franc ceiling is an extreme measure that carries “considerable” risks.

“The minimum exchange rate has met with the support of the general public and the political domain,” Zurbruegg said in Lucerne, Switzerland, late yesterday. “However, it should be regarded as an extreme measure. It is not a panacea for all the problems facing the Swiss economy, and carries considerable risks.”

The SNB introduced a ceiling of 1.20 francs per euro in September 2011 after the franc rose to a record against the European single currency, hurting exporters and increasing the risk of a general drop in the price level.

While Zurbruegg didn’t specify what the dangers of the currency cap might be, he referenced an April 27 speech by SNB President Thomas Jordan, in which the central bank head mentioned the potential of “very considerable expansion of foreign currency reserves” associated with the franc ceiling.

Since the introduction of the minimum exchange rate, the SNB has piled up unprecedented currency holdings to defend the ceiling. While reserves fell last month, they still amount to almost 70 percent of Switzerland’s gross domestic product.

“The excessive appreciation of the Swiss franc is a monetary problem, because it carries the risk of deflation,” Zurbruegg said. He spoke at Lucerne University, where he received an honorary doctorate on Nov. 8.

Swiss price stability “is not under threat for the next few years,” Zurbruegg said, citing the SNB’s inflation forecast. “As the crisis recedes, however, central banks will face the challenge of returning monetary policy to normal in a timely manner and reabsorbing liquidity.”

“The SNB’s mandate is to ensure price stability while taking due account of economic developments,” he said. “We will continue to take all action necessary to fulfill this mandate.”

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