SNB: Intervention in the foreign exchange market necessary for price stability
Published: Tuesday, Apr 9th 2024, 18:51
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Without the foreign exchange market interventions of the Swiss National Bank (SNB), there would have been no price stability in the last 15 years. This was stated by SNB Vice-Chairman Martin Schlegel at a lecture in Geneva on Tuesday.
Since the SNB began using the instrument during the financial crisis in 2009, inflation has averaged 0.3 percent annually, Schlegel said in his speech. "According to estimates, it would have been well below zero without the purchases." This means that the SNB would have missed its target of keeping inflation in the 0 to 2 percent range.
The interplay between key interest rates and interventions has always been important. In recent months in particular, a combination of interest rate hikes and foreign currency sales quickly brought inflation back into the price stability range. "Without the use of foreign currency sales, the SNB would have had to raise the key interest rate more sharply," said the SNB Vice-Chairman.
"Winning is not our job"
However, he conceded that this instrument had side effects. For example, the SNB's balance sheet reached a record value of one trillion Swiss francs in 2022, which corresponds to almost one and a half times Swiss GDP. And this in turn has led to greater fluctuations in the SNB's annual result.
As a result, there have recently been no more distributions to the Confederation and the cantons. In this context, Schlegel repeated the SNB's mantra: "Our mandate is to ensure price stability, not to make profits." The SNB's equity capital is currently too low. Building this up must take priority over profit distributions.
He also emphasized that the currency purchases had shifted the currency risks from the private sector to the SNB. Since 2009, Swiss companies and investors have increasingly brought their profits back to Switzerland from abroad and hedged their currency risks. This has increased the upward pressure on the Swiss franc. "The SNB has taken on some of these risks in order to ensure price stability," says Schlegel.
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