Switzerland Was Right to Scrap Its Franc Cap, Economists Say

  • Central bank gave up cap in January 2015, risking recession
  • SNB can expand balance sheet to 120% of GDP with interventions

The Swiss National Bank’s surprise decision a year ago to remove its ceiling on the franc was justified, according to the vast majority of economists in Bloomberg’s monthly survey.

The SNB abandoned the cap on Jan. 15 of last year, saying interventions to sustain it would have been out of proportion to its economic advantages. With the benefit of 12 months of hindsight, all but two of 23 economists answered that the move was indeed right.

“The SNB couldn’t have gone on forever defending the cap, as the overall cost, both politically and economically, was too high,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “All things considered, Switzerland hasn’t done too badly in the aftermath of the currency change.”

The franc surged against the euro after the cap was given up, and finished 2015 roughly 10 percent stronger against the common currency. Abolishing the ceiling in anticipation of large-scale asset purchases by the European Central Bank caught investors off guard, especially because Swiss policy makers had affirmed the strategy just a few days before.

Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich, said it would have been “extremely costly” to defend the policy against the impact of ECB quantitative easing. Still, in his view, “the timing and communication of the measure remains poor.”

Twin-Pillar Strategy

The pace of economic growth halved in 2015 and consumer prices fell the most since 1950, as the strong franc made exports less competitive and imports cheaper.

The franc strengthened 0.2 percent against the common currency on Wednesday, trading at 1.09268 per euro at 2:59 p.m. Zurich time.

In lieu of the cap, the SNB has introduced a twin-pillar policy of a negative deposit rate and a pledge to intervene in currency markets if necessary. SNB President Thomas Jordan has said the deposit rate, currently at minus 0.75 percent, isn’t yet at rock-bottom, though there is a limit to how low it can be cut since at some point people will begin hoarding cash.

Economists see scope for the rate going lower, according to the survey conducted from Jan. 8 until Jan. 15. In terms of more currency interventions, the SNB can expand its balance sheet to about 120 percent of gross domestic product -- from roughly 100 percent now -- before its pledge to wade into markets gets thrown into question, the survey also found.

“The SNB still has leeway to ease its monetary policy,” either through a rate cut or foreign-currency purchases, said Maxime Botteron, an economist at Credit Suisse Group AG. While there’s no line in the sand on interventions, “a very large balance sheet would probably raise the political pressure on the SNB, in particular in case of substantial losses.”

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