SNB may consider changing exchange rate ceiling

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Ernst Baltensperger, a former adviser to the Swiss National Bank (SNB), has said on Sunday that the central bank should consider replacing the Swiss-franc peg to the Euro with a more flexible tie to a currency basket to give the bank more room to manoeuvre.

Baltensperger said in an interview with NZZ am Sonntag that fixing the Swiss franc at 1.20 euros is too rigid and that the SNB should adapt its policy so that it may react more flexibly. Since fixing the Swiss currency in September 2011, the central bank was forced to buy euros to keep the franc at the required level.

The exchange rate ceiling has worked well so far, Baltensperger told the Zurich-based Sunday newspaper. “But it was always clear that it also entailed costs and risk,” he added. He also criticised the tendency of the public to focus too much on the losses on the currency reserves. 

Still, in December the SNB had to introduce negative interest rates to defend its exchange rate ceiling with the euro. Falling oil prices, the crash of the Russian rouble and a spending spree by the European Central Bank further increased the franc’s appeal as a safe haven currency.

Now the political pressure is increasing to drop the peg, the central bank advisor said in the interview. There is a danger that the central bank will not be able to reduce its currency reserves quickly enough, and such a peg may lead to undesirable developments that will be difficult to correct, Baltensperger argues in the interview.

Baltensperger suggests pegging the Swiss franc to a currency basket consisting of dollars and euros. Such a basket would allow the central bank to adapt their current policy without making the Swiss franc “overly attractive”. Such a policy would make speculation on the Swiss franc unattractive to currency market adventurers, Baltensperger said.