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The Swiss National Bank (SNB)
on Tuesday set out to stall the “massive overvaluation” of the franc by setting a minimum exchange
rate target of SFr1.20 to the euro.
The move on Tuesday morning shocked foreign exchange
markets and had the desired effect. The franc fell 8.2% against the euro to
SFr1.2015 and it lost 8.8% against the dollar to SFr0.8563.
"With today’s decision, the SNB
sets foot on a challenging journey," Philipp Hildebrand, SNB chairman, said.
"We have to accept the fact that the costs associated with it might be very
high. At the same time, doing nothing would almost certainly inflict tremendous
long-term damage on our economy. With today’s measure, the Swiss National Bank
is acting in the interest of the country as a whole."
Economics minister Johann
Schneider-Ammann, who a day earlier had called on the central bank to take
action, said the government backed the measures.
“I’m extremely happy that they took this decision. I think it was the right
moment to do so,” said Schneider-Ammann. He said it would help ease problems for
firms and had a psychological impact. “It will bring back confidence and some
“The current massive overvaluation of the Swiss franc poses an acute threat to
the Swiss economy and carries the risk of a deflationary development,” the SNB
said in a statement.
The SNB stated that it was prepared to buy foreign currency in unlimited
quantities, adding that the franc was still high at SFr1.20 to the euro, but
should continue to weaken over time.
The franc has
risen 25% against major currencies in the past 4 years.
The last time the Swiss franc's value was limited in a
similar manner was 1978, when its exchange rate against the German mark
Economic historian Tobias Straumann told the swissinfo.ch, the Swiss information
service, that there are strong
parallels between that period and now. He added that the decisive signals sent
out by the SNB on Tuesday could have the same effect as in 1978 when the franc
depreciated by 20% against the German mark within three weeks.
"I think the chances of success are high because the market now has a clear
statement of intent," he told swissinfo.ch. "The currency markets, exporters and
importers are now in a better position to make future calculations."
The 1978 measures resulted in 7% inflation in the early 1980s. A
repeat of these levels depends on how much money the SNB has to print to back
its words - - and that depends on how much credibility the central bank has in the
"If the markets believe that the SNB is really prepared to risk price
instability then they will not act against this target," Straumann said.
"The SNB would only have to print money if its exchange rate floor is challenged."
The Financial Times says that the
central bank, which is in part privately owned, lost almost SFr20bn last year
after fruitless interventions in the foreign exchange markets that left it
holding massive quantities of euros and dollars, whose value steadily declined
in Swiss franc terms.
The Swiss could alternatively impose
a punitive tax on speculative inflows - - it wouldn't be too difficult to
identify the major ones - - above trend deposits from multinationals and
significant new inflows in the past 12 months.