SNB defends currency intervention as essential

Bloomberg

Currency intervention is an “essential” policy tool for Switzerland, its central bank chief said, in a riposte to the US which has the country on a watchlist for allegedly manipulating its exchange rate.
“Even though we still have scope for further interest-rate cuts, the fact remains that one cannot lower interest rates indefinitely,” Swiss National Bank (SNB) President Thomas Jordan said in a lecture for the International Monetary Fund. “For this reason, interventions in the foreign exchange market, in which we buy foreign currencies and sell Swiss francs, also play a central role in our policy mix.”
The US Treasury earlier this year put Switzerland back on a list of countries that it believes are manipulating their exchange rates for competitive gain, citing the nation’s high current-account surplus and bilateral trade balance as evidence.
Yet Swiss policy makers have long relied on interventions to prevent too much strength in the franc, which investors tend to flock to at times of stress.
Despite myriad attempts over the years to limit its rise — including imposing the world’s lowest interest rate at minus 0.75% — the franc is still roughly a third stronger versus the euro than it was a decade ago. More interest-rate cuts would risk distorting the economy, upsetting savers and further burdening Switzerland’s banks, which say the policy erodes their profits.
At least in public, Swiss officials have signalled that they’re not worried about being on the watchlist, saying US understands their position. The IMF said last year that Switzerland’s currency actions are “appropriate.”
“Our experience shows that foreign exchange market interventions and the negative interest rate are essential for a small open economy with a safe-haven currency in a global low interest rate environment,” Jordan said. “The combination of these two monetary policy instruments is more effective and results in fewer undesirable side effects overall than concentrating on just one of them.”