Switzerland Introduces Quantitative Easing

The Swiss central bank cut its interest rate close to zero today and started buying foreign currencies to stem the franc’s appreciation in the face of a deepening recession and a looming deflation threat (Hat Tip`MacroMan). The result was pretty predictable, the franc plunged the most against the euro since the single currency was introduced, dropping as much as 3.2 percent after the announcement, and hitting 1.5304 per euro at one point. Heady days ahead folks, fasten up your safety belts for what is now bound to be a bumpy ride. Central banking has never been so interesting.

With Switzerland’s economy set to shrink between 2.5 percent and 3 percent this year, according to SNB forecasts, and prices about to decline by at least 0.5 percent this year (with inflation “very close to zero” in 2010 and 2011) the bank is obviously very worried about following Japan into the deflation hole, and is determined to at least go down fighting. Dropping your currency violently is one of the best know remedies to fight deflation (see Lars Svensson – various, and now Deputy Governor of the Riksbank – if you have any doubt), that and pumping liquidity hard and fast into the system. But what if the UK, the US, the Eurozone and Japan all want to “ward off deflation” in the same way? Won’t we be back to the 1930s. Exactly. So someone has to play the part of the “big man” here, and take deflation firmly on the cheek. I don’t exactly see the candidates lining themselves up right now, although China is stepping up to the plate at the moment (more out of fear of what would happen if they devalue I think, than out of conviction it is a good policy for them). Will the eurozone be next? Watch Jean Claude Trichet’s after-the-rate-meeting April comments for the next episode in this thrilling story.

The economic situation has deteriorated sharply since last December, and there is a risk of negative inflation over the next three years. Decisive action is thus called for, to forcefully relax monetary conditions. Against this background, the Swiss National Bank (SNB) is making another interest rate cut and acting to prevent any further appreciation of the Swiss franc against the euro. To this end, it will increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets. The SNB is lowering the target range for the three-month Libor by 25 basis points, narrowing it to 0–0.75%, with immediate effect. It will use all means at its disposal to gradually bring the Libor down to the lower end of the new target range, i.e. to approximately 0.25%. Thus, the Libor now has a narrower target range of 75 basis points, compared with 100 previously.
SNB Statement

Update Friday

It seems over at the Financial Times they broadly agree with the above interpretation, since in an article in today’s edition headed “Swiss action sparks talk of ‘currency war’” by Peter Garnham you can find the following:

Analysts said the move was likely to increase talk that countries were set to engage in a bout of competitive devaluation.

“Let the currency wars begin,” said Chris Turner at ING Financial Markets.

Countries around the world faced with the constraint of zero interest rate levels might feel it was acceptable to intervene to weaken their currencies in order to ease monetary conditions, he said, adding that other export-dependent economies such as Japan would “probably be at the head of the queue”.

Michael Woolfolk at Bank of New York Mellon agreed.

“Market intervention by a major central bank such as the SNB opens up the door for other central banks, namely the Bank of Japan, to follow suit,” he said. “The yen is widely perceived in Japan to be overvalued.”

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

16 thoughts on “Switzerland Introduces Quantitative Easing

  1. Pingback: Switzerland delivers polite “Na” to IMF | afoe | A Fistful of Euros | European Opinion

  2. I think we have complementary posts — to me the exchange rate angle merited a separate treatment. You are right to make the Svensson reference (one of us needs to check the spelling of his name).

  3. “one of us needs to check the spelling of his name”

    Me obviously, and unsurprisingly 🙂

    I’m changing it now.

    “I think we have complementary posts”

    Well then, we were in sync.

  4. A couple of points

    First note that the SNB is only buying Euros and not other currencies, this is explicitly stated in the SNB announcement.

    Second, the SNB move is actually not really a case of competitive devaluation but rather a surprising sign of global coordination.

    The SNB targets the EURCHF rate for obvious reasons ( Euro area trade is huge % of Swiss exports ) but the ECB does not care that much since Swiss trade is less than 5% of the Euro area trade, so not a huge knock.

    On the other hand though , a weaker CHF alleviates the pressures on the CEE homeowners that have CHF denominated mortgages. This has been a big concern recently , and has knocked down the stocks of Euro area banks and even of the Euro itself.

    So the SNB move is actually a partial bail out of CEE , which is good for the Eurozone , so its unlikely that it will be opposed by anybody.

    This is surprisingly not a zero sum game, since most people win ( Swiss exporters , CEE homeowners , the Euro credibility is enhanced) and few people loose ( people with CHF denominated incomes , ie Swiss consumers , and some Euro exporters ).

    Market action yesterday validates the above points: CEE currencies , CEE CDSs and bank European bank stocks with large CEE exposures not only rose but outperformed the market , a sign that the move was perceived as positive rather than a race to the bottom

    The case for other currencies to engage in competitive devaluation is much more hard to defend however.
    Indeed Sweden has been at the forefront of worries due to the Svensson speech, but Swedish crown was one of the strongest currencies yesterday and still is this morning , so the
    initial reaction does not validate your speculation.

    So hold the global war worries for another day maybe.

  5. Hi Currency Wars,

    “First note that the SNB is only buying Euros and not other currencies, this is explicitly stated in the SNB announcement.”

    This is a good point. It also could be seen as a way of helping Austrians, who also (for pre euro historical reasons) have CHF loans, in fact they started the fashion. Indeed, CHF lending (as opposed to euro loans) make little sense in the East where it not for the fact that it was Austrian banks who initiated.

    “On the other hand though , a weaker CHF alleviates the pressures on the CEE homeowners that have CHF denominated mortgages.”

    Well, this is certainly a way to “market” the policy, and this is what they have done, for all they are worth.

    In fact, outside Hungary and (too a much lesser extent Poland and Croatia – the main banks which went up today seem to have been Poland’s BRE and Hungary’s OTP) the presence of CHF lonas is not that important – big worries inside the eurozone at the moment in terms of Fx exposure (apart from Hungary) are Romania, Bulgaria and the Baltics, and lending there is all in Euros. The Bank for Inetrnational Settlements in a study in 2007 found “little evidence in the cross-border data of unusual borrowing in Swiss francs that might correspond to Swiss franc-denominated retail lending”, although they did make an exception in the cases of Hungary and Croatia, where they noted that lending in Swiss francs to retail clients reached over 10% (and of course in the Hungarian case well over 10%) of the total retail loans in those countries. Indeed swiss franc loans now seem to account for over 80% of all newly generated housing related credit in Hungary. I explore this topic in full on my Hungary blog. The Hungarian government has been actively considering subsidising people crossing over to HUF loans, but the Hungarian in the street seems to be more focused on the short term monthly payments issue (given that NBH benchmark rates are at 9.5%, while CNB just went, as we already know, near to zero).

    “The SNB targets the EURCHF rate for obvious reasons ( Euro area trade is huge % of Swiss exports ) but the ECB does not care that much since Swiss trade is less than 5% of the Euro area trade, so not a huge knock.”

    But the main point I would make is that what I’m focusing on here is the devaluation as an anti deflation weapon, rather than competitive export oriented devaluations. What they want to do is lower the value of their currency to increase the price of imports, if you like. In this sense it doesn’t really matter which currency you buy, although as I say, it makes it easier to sell if you say you are helping the CEE.

    They do couch the intervention in explicitly anti-deflation terms:

    “and there is a risk of negative inflation over the next three years. Decisive action is thus called for”

    so while here in Europe we not be especially worried by this development at this point (officially Trichet sees no deflation threat, like Nelson, he has the telescope on his blind eye), I doubt what they have just done will be lost on Japan and China, where the pain is really being felt at this point, and where deflation is seen as being a much greater menace, in particular with their recent bad experience with NPLs in the banking sector.

    What I am worried about here is the precedent which is being set, and I think what you call “market sentiment” is being excessively eurocentric and complacent at this point. Both China and Japan can print very large quantities of money any time they like. Surely they would also be being very cooperative globally, helping their regional neighbours in S Korea, Taiwan and Spore ramp up exports to Europe and the US, thus alleviating pressure in the region, or is global cooperation merely a European phenomenon?

    Fortunately China’s Premier Wen Jiabao is restricting itself at the moment to putting on pressure on the US by “worring” about its holdings of Treasuries and asking for assurances its investments are safe.

    “We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

    This is obviously the opening gambit in a negotiation, the thing is what does the Chinese administration want in return for holding US Treasuries?

    They need relief, just like the East of Europe does.

    “Market action yesterday validates the above points”

    Well look, that was an initial knee jerk. Markets are like that. The forint is already down again today, and action on this level is certainly not going to save Hungary’s bacon. I think the CEE thing is just window dressing, on an action they need to take, after all people have been taking CHF loans because interest rates have been low, and interest rates have been low because of deflationary tendencies in the economy. Switzerland is simply a milder version of Japan on this level.

    “So hold the global war worries for another day maybe.”

    Agreed, next week or the week after perhaps 🙂

    But seriously, don’t underestimate where all this can lead, with time, since the pain is real, and all this is not as controlable as some might like to believe it is.

  6. Incidentally, the benefit to the CEE currencies didn’t last very long vis a vis the euro (see extract from Portfolio Hungary below). This kind of currency intervention gesture seldom works in the longer term. But if they are prepared to systematically print money at the CNB, and others do not do likewise, then they could have some impact on deflation, and change euo/CHF in the process. Of course the only longer term relief they will get is from the carry trade once global activity recovers, but when will that be? Meantime the Hungarian government are talking about embarking on a real solution to the CHF mortgages issue, which is to subsidise the tranfer of all of them to HUF mortgages – with the costs being shared between banks, individuals and the government. But since the government is nearly bankrupt, and the banks are in some difficulty, this basically means the EU will, at some point, have to pay.

    Basically, what seems to have happened is that a lot of short position holders closed their positions due to the uncertainty on Thursday, and then reopened them on Friday, as could have been anticipated.

    ******************************************

    Hungary’s forint was at its three-week firmest to the euro at 293 in morning trade on Friday, but – as a correction of yesterday’s sharp firming – it started to ease markedly. Amidst a relatively positive global investor mood the HUF managed to stay just below 300.

    Poland’s zloty and the Czech koruna have mimicked the forint’s moves against the euro today and on Thursday, albeit their swings were not as heavy as at the HUF.

    EUR/HUF was around 302 on Thursday morning and eased to 309 in afternoon trade only to firm to 294 in the evening. The forint hovered around 293 and 299 in today’s session. Thursday’s sharp appreciation could have knocked out the positions of some punters that aimed to weaken the HUF and today’s easing could be a sign that short positions were reopened. In later afternoon trade the forint was quoted at around 299 vs. the EUR.

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