The Swiss National Bank is unlikely to change course from its ultra-loose monetary policy as the novel coronavirus pandemic increases appreciation pressure on the safe-haven Swiss franc, SNB Chairman Thomas Jordan said on Tuesday.
The SNB’s twin-track approach of foreign currency purchases and negative interest rates “remains more necessary than ever”, Jordan said in remarks prepared for a speech to the International Monetary Fund.
“Foreign exchange market interventions were and still are the most direct and thus the most effective instrument besides the negative interest rate,” Jordan said.
“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 SNB had intervened more strongly in recent months to ease upward pressure on the franc, which in May hit its highest value against the euro in nearly five years.
Sight deposits, a proxy for the central bank’s foreign currency purchases, have risen by more than 100 billion Swiss francs ($106 billion) this year as the SNB sought to dampen investor demand for the franc caused by the coronavirus pandemic.
Negative interest rates were necessary as other central banks loosened policy and uncertainty made franc investments more attractive, Jordan said. The SNB policy rate of minus 0.75%is one of the lowest in the world.
“Even though we still have scope for further interest rate cuts, the fact remains that one cannot lower interest rates indefinitely,” Jordan said.
The SNB tries to keep a lid on the franc to prevent deflation and protect the Swiss economy. Jordan signaled the current policy, in place since 2015, was unlikely to change soon.
“In the longer term, inflation could rise again due to the global increase in public debt,” he said. “The challenge will then lie in identifying the right time and the right pace for monetary policy normalisation in order to ensure price stability.”