Central banks have delicate balancing act

Keystone

The global economic recovery has to show signs of greater strength and sustainability before central banks start selling off their massive stockpiles of assets, the World Economic Forum’s Davos summit heard on Friday.

With the United States Federal Reserve slowing the rate of its own spending spree, all eyes are on other central banks to see if they follow suit.

The Swiss National Bank (SNB) has seen its balance sheet bloat from CHF100 billion ($112 billion) in 2006 to nearly CHF500 billion in defence of the franc. But the franc-euro exchange rate would have to ease before the SNB begins to empty its vaults.

Speaking in Davos, SNB president Thomas Jordan said central banks “should not worry too much about the size of balance sheets” despite making them vulnerable to asset price swings. Last year’s plunge in gold prices saw the SNB record a CHF12 billion annual loss, much to the chagrin of cantons that did not receive any payouts as a result.

Jordan was unapologetic in Davos. “Losses on asset classes [in this case gold] should not be a reason to change monetary policy,” he told delegates.

On Thursday, Jordan also proved unpopular by asking the government to force banks to increase their capital buffer reserves against the risk of mortgage defaults, in the face of rising real estate prices. The move showed that the SNB can still flex its muscles despite maintaining rock bottom interest rates.

Jordan is not worried about popularity, but a speech he gave earlier this month revealed that is concerned about Switzerland becoming over-reliant on the SNB to hold the economy together.

It would be “exceedingly dangerous” if the SNB became the default go-to institution for ensuring economic growth, high employment rates, low interest rates and a healthy real estate market, he said.

“As a result, other agents [government, commercial banks and businesses] could be induced to neglect their responsibilities,” he chided