Switzerland had no choice but to withdraw its commitment to maintain a floor of 1.2 Swiss francs to the euro in January 2015 or it would have faced an “enormous speculative attack”, according to Thomas Jordan, chairman of the Swiss National Bank (SNB).
Failure to have shifted policy from the floor would have resulted in a ballooning of the SNB’s balance sheet – already swollen to around $750 billion – with no upside benefit, Jordan tells Central Banking journal in an in-depth interview published on July 31[1].
Jordan explains that the problems emerged after the euro started to decline against a basket of the world’s reserve currencies in late 2014. Following this, the Swiss franc, too, started to weaken against those currencies with the SNB predicting further euro weakness in 2015. This meant preserving the three-year-old currency barrier became unsustainable.
“Maintaining the minimum exchange rate toward the euro would have created completely distorted exchange rates for the Swiss franc with regard to the US dollar, sterling and other currencies,” says Jordan. “Soon, every market participant would have realised that this policy was no longer sustainable. We would have been faced with enormous capital inflows and a self-reinforcing speculative attack.”
He also defended the central bank’s decision not to forewarn market participants, despite making previous assurances[2] the SNB would defend the euro floor with the “utmost determination”.
No signal benefit
The Zurich-based Swiss central bank chief says there was no desire to shock the market but the circumstances were such that there was no other option.
“Signalling the exit from this policy in advance would have
