Wednesday, August 03, 2011

Switzerland Goes For Zero

In a bid to limit the rapid and relentless appreciation of the Swiss franc against particularly the euro and the U.S. dollar, but also against pretty much all other currencies as well, the Swiss National Bank reduced its key interest rate from 0.25% to "as close to zero as possible" and also initiating "quantitative easing".

The move will limit the franc's gains but probably not stop it entirely as long as for example the euro area, Britain and the U.S. has deep problems. It is a cheaper way of limiting the gains than the extremely costly foreign asset purchases. Doing like Brazil and tax foreign capital inflows would also limit the gains, but not be as effective as in Brazil because of the large current account surplus and it may not at any rate be compatible with Switzerland's free trade agreements with the EU.

Given the fact that Switzerland indeed has a very large current account surplus, it could be argued that the super-strong franc is a good thing that will reduce global imbalances. But in practice exchange rates aren't as effective as commonly assumed in reducing imbalances and the extreme magnitude of the gains (up 45% against the U.S. dollar and 30% against the euro since June 2010) is having a clearly disruptive effect on the Swiss economy.


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