Switzerland Weathers the Superstrong Franc

The central bank spent billions defending the exchange rate cap.

Swiss Franc Shock One Year On

It was in a small, wood-paneled boardroom overlooking Lake Zurich that Thomas Jordan and his colleagues at the Swiss National Bank made a decision that caught global markets unawares, infuriated Swiss industrial leaders, and tipped the economy dangerously close to recession.

Sitting in that same room a year later, Jordan, president of the SNB, the nation’s central bank, is calm as he looks back on his call to scrap a cap of 1.20 francs to the euro. The bank had kept it in place since 2011 in an attempt to control the Swiss currency’s runaway strength and avoid further damage to the country’s exports, which make up more than 60 percent of gross domestic product. “We have no regrets because we believe it was exactly the right decision at exactly the right time,” he says of the momentous step, announced at 10:30 a.m. Central European Time on Jan. 15, 2015. “Sometimes you have to take tough decisions.’’


The exchange rate cap was meant to keep the franc from rocketing in value as outside investors poured into the Swiss currency, a traditional haven when the world—and especially Europe—is in financial turmoil. Yet the demand for francs and the weakness of the euro had become too much for the Swiss central bank to bear. A year ago, Swiss officials were spending billions of francs buying euros as the prospect of quantitative easing by the European Central Bank and further weakness in the euro intensified the upward pressure on the franc.

From about 1.60 per euro shortly before Lehman Brothers collapsed in 2008, the currency went on an unstoppable appreciation, almost reaching parity with the euro before the ceiling was introduced in September 2011. The three-year struggle to maintain the cap resulted in a massive buildup in foreign-currency reserves. With pressure on its cornerstone policy continuing to mount, the SNB announced a 0.25 percent charge on deposits banks hold with the central bank.

In January 2015, Jordan, along with fellow policymakers Jean-Pierre Danthine and Fritz Zurbrügg, decided to scrap the exchange rate limit in one quick move, like ripping off a bandage. “Delaying the decision would have led to a much worse outcome for the economy,” says Jordan. “The appreciation of the franc would’ve happened anyway.” At the same time, the SNB announced an increase to 0.75 percent in the deposit charge.

Sure enough, within minutes of the cap being removed last year, the franc rose as much as 41 percent against the euro. When the news hit, at the peak of franc trading, investors were taken by surprise, since the central bank had affirmed the policy just days earlier.

Banks racked up millions of dollars in trading losses, and a New Zealand-based broker was forced to shut down. Swiss industry was taken by surprise, too. Swatch Group Chief Executive Officer Nick Hayek was among those who reacted, saying the SNB had unleashed a “tsunami.” He later described the central bank as “weak” and lacking leadership. Among economists, assessments of the SNB’s action ran the gamut from “brave” to “one of the worst central bank decisions ever.”

Thomas Jordan
Swiss National Bank President Thomas Jordan.
Photographer: Michele Limina/Bloomberg

Swiss economic growth did suffer, with the surging currency making exports still more expensive in the euro zone, its largest market. Exports to the euro area dropped 8 percent in the first nine months of the year. The economy shrank 0.3 percent in the three months through March 2015. Yet it managed to eke out growth in the subsequent three months, skirting a recession, with companies clamping down on costs and boosting efficiency. Unemployment hasn’t posted a big rise and, with the franc having weakened slightly against the euro in recent months to about 1.09, Jordan sees growth accelerating to about 1.5 percent this year from just under 1 percent in 2015. The SNB president says the franc is still overvalued.

Although Switzerland may be famous for skiing, watches, and cheese, its growth has historically been driven by a mix of financial services, notably private banking, a pharmaceutical industry that includes Roche Holding and Novartis, and the manufacture of high-quality, technically sophisticated goods. Fortunately for Switzerland, some of these high-end industries are less affected by the strength of the currency. “Given the strong appreciation of the Swiss franc, the economy is doing relatively well,” Jordan says, though the situation remains “a challenge for many, many firms.”

The central bank chief, who studied at the University of Bern and attended Harvard, is very aware of the continuing battle he faces. He cites everything from weakening in the economies of China and Brazil to the price of oil and even Britain’s referendum on European Union membership as potential sources of trouble. Although it’s still much lower than in neighboring France or Italy, the jobless rate rose throughout 2015, to a five-year high of 3.4 percent in December; that month, there were nearly 8 percent more job seekers than at the end of 2014.

The strong franc also dampens price pressures by making imports cheaper. Consumer prices tumbled 1.1 percent last year, the most since 1950.

Jordan says the negative deposit rate, still at 0.75 percent, and the SNB’s proven willingness to sell francs even after removing the cap will help weaken the Swiss currency over time. That can only help the economy, as would healthier growth in the euro region. Says Jordan: “Given the difficult situation we’re in, the main focus of the board is on monetary conditions and to see how we can steer Switzerland through this very, very stormy weather.”

The bottom line: A year ago economists were predicting the worst after Switzerland scrapped the currency cap. Now the economy is growing.

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