FT: Swiss tried to put ceiling on franc before

Swiss tried to put ceiling on franc before

By Claire Jones, economics reporter

Published: September 6 2011 17:27 | Last updated: September 6 2011 17:27

Switzerland’s reputation as a safe haven has long supported the country’s currency and Tuesday was not the first time that the central bank has tried to put a ceiling on the franc’s appreciation.

In October 1978 – a little more than five years after Switzerland abandoned its fixed exchange rate – the Swiss National Bank set a ceiling above which it would not allow the Swiss franc to rise against the Deutsche mark.

The central bank faced similar circumstances then as it does now. A rise in the Swiss franc had raised the chances of a recession and deflation. The SNB had intervened in the foreign exchange market but with little success. It had introduced levies on foreigners’ Swiss franc deposits – again to little avail. With interest rates already very low, the SNB regarded the ceiling as the only option left.

In one regard, the ceiling worked. The Swiss franc declined against both the Deutsche mark and the dollar. But inflation rose. In order to defend the ceiling the SNB had to buy foreign currency in exchange for Swiss francs. But the central bank was forced to buy foreign currency on such a grand scale that the amount of Swiss francs in circulation rose to a level that caused inflation to rise, eventually peaking at 7 per cent in 1981.

The SNB abandoned its fixed exchange rate in 1973 for similar reasons – inflation had surged to as high as 12 per cent in the early part of the decade. Throughout the 1970s, very loose US monetary policy – and high global inflation – not only pushed the Swiss franc higher but contributed to price pressures when the central bank tried to cap the currency’s gains.

More than 30 years later, monetary policy in the US – and across advanced economies – is equally loose. But, so far, central banks’ willingness to cut rates and increase the size of their balance sheets has not pushed inflation to the levels of the late 1970s. The SNB will hope Switzerland does not prove the exception.

Copyright The Financial Times Limited 2011.