SNB monetary policy after the discontinuation of the minimum exchange rate

Thomas Jordan, Chairman of the Governing Board

107th Ordinary General Meeting of Shareholders of the Swiss National Bank, Berne, 24.04.2015

On 15 January 2015, the Governing Board of the Swiss National Bank (SNB) decided to discontinue the minimum exchange rate of CHF 1.20 per euro because the international environment for its monetary policy had changed dramatically. Due to the sustained weakening of the euro during the first half of January 2015, the minimum exchange rate could only be enforced through permanent currency interventions of rapidly increasing magnitude. This meant that the minimum exchange rate was no longer sustainable.

However, the end of the minimum exchange rate does not mean that the SNB has reverted to business as usual for monetary policy. Overall, the Swiss franc is significantly overvalued. A correction of this overvaluation is to be expected over time. The SNB continues to take account of the exchange rate situation in formulating its monetary policy. It monitors developments on the foreign exchange market and their potential impact on Switzerland very closely. It will remain active in the foreign exchange market as necessary in order to influence monetary conditions.

When it discontinued the minimum exchange rate, the SNB lowered the interest rate for balances held in its sight deposit accounts to -0.75%. Low or negative interest rates are a worldwide trend which Switzerland cannot escape. Towards the end of last year, the interest rate differential between investments in foreign currencies and those in Swiss francs declined to almost zero because interest rates abroad fell more sharply during the financial crisis than they did in Switzerland. This made the Swiss franc even more attractive for domestic and foreign investors. Since foreign interest rates are close to zero or negative, Swiss interest rates cannot remain at zero. They have to move into negative territory in order to restore the traditional interest rate differential, thereby making it more expensive to hold Swiss francs than other currencies.