Reconciling Switzerland's minimum exchange rate and current account surplus
Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank
Peterson Institute for International Economics, Washington D.C., 08.10.2013
Complete textPDF (466 KB)
The Swiss National Bank (SNB) established a minimum exchange rate of CHF 1.20 against the euro two years ago. In so doing, it took action against an excessive strengthening of the Swiss franc that was threatening price stability and the Swiss economy. This measure was thus essential, irrelevant of Switzerland's large current account surplus. With interest rates close to zero, the minimum exchange rate helped avoid a dangerous tightening of monetary conditions.
The Swiss current account surplus is due to very specific factors. The goods trade account, for instance, makes only a modest contribution. The three most important elements with regard to the current account surplus are investment income from Switzerland's substantial net international investment position; financial sector earnings from business with customers abroad, which is traditionally a significant source of revenue for Switzerland; and earnings from merchanting, which have risen sharply over the past decade.
These three elements are dependent on developments abroad, international financial markets, and global demand for commodities. The Swiss franc exchange rate, by comparison, does not play a decisive role. Thus, Switzerland's current account surplus gives no indication about the strength of the Swiss franc. Nor is the surplus a suitable measure for assessing Switzerland's share in global imbalances. It is much more the case that Switzerland and its extensive level of direct investment abroad contribute significantly to balanced global economic growth.
SNB monetary policy is focused on ensuring price stability, while taking due account of economic developments. To fulfil this mandate, the SNB must secure appropriate monetary conditions. The current account surplus does not play a role in monetary policy. In an open economy like Switzerland, however, sizeable exchange rate fluctuations have a strong impact on production and prices. In the current environment, and with interest rates close to zero, the minimum exchange rate remains essential. The EUR/CHF exchange rate has settled at slightly above the 1.20 mark since September 2012. However, the risks in the world economy are still to the downside and the Swiss franc is still high. Therefore, the minimum exchange rate can prevent an undesirable tightening of monetary conditions in the event that the upward pressure on the Swiss franc should intensify once again.