Why the Swiss National Bank (SNB) decided to abandon its managed Swiss franc floor against the...

Why the Swiss National Bank (SNB) decided to abandon its managed Swiss franc floor against the euro last January 2015?

Expert Solution

15 January, the Swiss National Bank discontinued its currency ceiling, set at 1.20 Swiss francs to the euro, less than four years after its introduction. The Swiss franc (CHF) appreciated immediately, reaching as much as 0.97 CHF to the euro that day. This currency move has had, and will continue to have, an impact both on the Swiss and the euro area economies: the system that has been in place is described briefly below as well as the consequences of the Bank's decision.

The two significant events were

in the international scene, the drop in oil prices observed since the end of June 2014 contributed to the fall of the Russian trouble, which has been trading as low as 76.5 roubles to the euro.

In EU, the positive Opinion of the Advocate General in relation to European 'quantitative easing' in the case referred by the German Constitutional Court pending the decision of the Court of Justice itself is being interpreted by markets as giving the 'green light' to the ECB to start quantitative easing (QE) which, in turn, is expected to drive the euro even lower in relation to the dollar, accentuating a slide which has started in June 2014 and may be even further precipitated by the result of the Greek elections on 25 January. In combination, all these factors are likely to spur once again a search for safe havens, leading investors to buy more Swiss francs.
In this context, to keep the ceiling on its currency, the SNB would have to intervene further as it has done since 2011, leading to further growth of its balance sheet. According to the Financial Times, although the Bank could have well chosen to do so (since in theory a central bank can print unlimited currency), any further balance sheet growth 'might have raised financial stability concerns'. Therefore, the SNB decided
that 'enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.

Rahul Sunny answered 2 years ago

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