Stable franc indicates SNB credibility intact

The central bank appears to be under no particular pressure from the markets Keystone

Switzerland may be gripped by claims of Swiss National Bank (SNB) chairman Philipp Hildebrand’s alleged insider trading, but the money markets have barely flickered.

The Hildebrand affair has so far failed to undermine the central bank’s defence of the SFr1.20 euro exchange rate ceiling, while observers doubt that the ongoing row will dent the SNB’s operational credibility.

The credibility of central banks is key to their efficiency at maintaining price stability and – as is the current case of Switzerland – at defending their currencies. If the markets believe a central bank has the resolve, skill and stamina to stick to its targets, they will rarely act against them.

The recent serious accusations of impropriety and illegal trading aimed against the top policymaker at the SNB could not have come at a worse time.

The SNB is currently balanced on a knife edge as it attempts to prevent the franc gaining even more against the euro. Several economists fear currency speculators could attempt to sabotage this balancing act if signs of weakness could be perceived.

Benign markets

The SNB would not comment on whether the franc has come under renewed pressure in the last few weeks since the Hildebrand rumours started circulating. Nor would the central bank shed any light on whether it had intervened in the currency markets since the turn of the year.

But Bank Sarasin economist Alessandro Bee said there had been barely any movement of the franc-euro exchange rate in the last few weeks.

“The markets would have reacted by now if they doubted the credibility of the SNB,” he told swissinfo.ch. “Speculators are now looking for other opportunities.”

Julius Bär bank chief economist Janwillem Acket believes the currency markets are viewing the Hildebrand affair as a local storm in a teacup.

“It created quite a scare for some people, but I cannot see it having a serious impact on the Swiss economy,” he told swissinfo.ch. “The credibility of the SNB is not hinged on one personality. It is a team that is functioning efficiently.”

“The lack of movement in the currency markets is a sign of confidence in the SNB’s policies,” he added.

Breathing space

The relative calming of the eurozone in recent weeks would have helped the SNB to defend the franc, Bee added. The European Central Bank acted last month to liquidity fears by offering huge amounts of cheap credit to banks, allowing Italy’s latest bond auction to prove  a success.

Recent economic data from both Europe and the United States has also eased pressure on their respective currencies. In the strained world of overwhelming sovereign debts sentiment could easily change, but for the time being the SNB appears to have some breathing space.

Switzerland’s own economic woes also make the franc a less attractive proposition, according to Alessandro Bee.

Stand by your man

“There is no reason to speculate in the Swiss franc at the moment on the back of calming European markets and Switzerland’s weak economic growth prospects,” he told swissinfo.ch.

Hildebrand said on Thursday that he would resist calls from the rightwing Swiss People’s Party and some sections of the media to resign.

An external audit of his wife’s transactions have cleared the SNB chairman of wrongdoing. But Hildebrand himself said the central bank’s internal regulations on the trades of directors was too weak to ensure full public confidence.

In an effort to restore local confidence in himself and the central bank, Hildebrand called on all trades of over SFr20,000 ($21,000) to be cleared in advance by the central bank’s governors.

Domestic criticism of Hildebrand continues in Switzerland with the jury seemingly out on whether he acted improperly. The bank’s governors and the government have both steadfastly backed Hildebrand throughout the affair.

For now at least, the international markets appear to be following suit regarding the credibility of the central bank as a whole.

The Swiss National Bank

Created in 1907, the Swiss National Bank (SNB) was given exclusive rights to print money in Switzerland and charged with ensuring price stability.

It has the legal status of a joint stock company, with Switzerland’s 26 cantons each holding a significant share in the bank.

The SNB is obliged to hand over two-thirds of its excess profits to the cantons each year and a further third to the government.

In the 1970s, the SNB intervened in the currency markets to stop the franc gaining in value against the German Deutschmark.

The operation was considered a success as it halted the franc’s rise, but it resulted in rampant inflation in the early 1980s.

The SNB was reorganised in the 1990s to turn it into a more streamlined organisation. The central bank’s independence was also written into the Swiss constitution, with the changed version coming into force in 2000 after a referendum.

The SNB’s independence was reiterated in the revised National Bank Act in 2004. At the same time, the SNB’s supervisory council was given greater strength to oversee operational standards.