Switzerland Could Act on Currency Again, Central Banker Says
Swiss Franc Is ‘Greatly Overvalued,’ Central Bank President Thomas Jordan Says
ZURICH—The Swiss central bank is ready to intervene in the currency markets again to weaken the franc if necessary, the bank’s head said, just two days after the removal of a cap on the franc triggered a surge in the currency’s value.
Swiss National Bank President Thomas Jordan said the central bank was forced to scrap its policy of keeping minimum exchange rate of 1.20 Swiss francs a euro due to divergent economic developments and mounting risk from its euro-buying operations.
The bank will continue to monitor the situation and act if necessary, Mr. Jordan said in an interview with Swiss newspaper Neue Zuercher Zeitung.
“We have said goodbye to the minimum exchange rate,” Mr. Jordan said in the interview published Saturday. “But we will continue to consider the exchange-rate situation in our decisions and intervene in the foreign-exchange market if necessary.”
The Swiss stock market swooned and shares in companies such as food giant Nestlé SA and pharmaceuticals maker Novartis AG had billions wiped from their values as shareholders sought to cash in on the sudden appreciation of the currency.
Stocks in some Swiss companies including watchmaker Swatch Group AG slumped as analysts reduced their sales and profit forecasts as a result of the franc’s rise. The higher value of the Swiss franc reduces the value of sales made in the eurozone, which accounts for more than half of its exports.
The minimum exchange rate had been in place since September 2011 and was intended to head off deflation and protect the competitiveness of Swiss companies.
Mr. Jordan said the franc remains “greatly overvalued.” He said he expects negative interest rates introduced by the SNB to make the franc less attractive, but ruled out introducing capital controls to further weaken demand for the currency.
He also said suggestions the SNB could impose capital controls, which would restrict the inflow of foreign funds in to Switzerland, to further weaken the franc “aren’t a realistic option.”
“The market will gradually find that this overestimation is not justified,” he said.
Mr. Jordan said the minimum exchange rate was abandoned following “long, intensive discussions,” which determined it could only be enforced with massive interventions by the bank to buy euros and sell francs.
“Had the national bank simply continued with minimum exchange rate and inflated our balance sheet, then we would have risked losing control over monetary conditions in the long term,” Mr. Jordan said.
The SNB’s balance sheet has risen to around 522 billion Swiss francs ($608 billion)—just under the size of the entire Swiss economy—as a result of its interventions.
The European Central Bank is expected next week to launch a policy of quantitative easing—printing money to buy the government bonds of member states to ease the pressure on their borrowing. Such a move would likely further weaken the euro.
“Large interventions are useful as long as their purpose is justified and sustainable,” Mr. Jordan added. “That was no longer the case.”
A permanent peg to the euro was never an issue, he added, because Switzerland has an independent currency and independent monetary policy.
“The franc is our currency; to link it to another currency wouldn’t make sense,” he said.
He defended the sudden announcement, saying signaling the bank was scrapping the cap would have encouraged more market speculation and heavy buying of the currency.