“This was not an easy decision… (but) we are convinced it is the right one,” Swiss central bank chief Thomas Jordan said in an interview published in Swiss dailies Le Temps and NZZ on Saturday.
The head of the Swiss National Bank (SNB) has faced widespread criticism both at home and abroad after the bank’s bombshell announcement Thursday that it was abandoning the minimum rate of 1.20 francs against the euro that it had been defending for more than three years.
The Swiss franc has since gained around 20 percent against other currencies and is now trading at near parity with the euro.
“The franc is significantly overvalued compared to the dollar and the euro,” Jordan acknowledged, noting that the bank had introduced negative interest rates that, in time, would help drive the value of the overheated currency back down.
He hinted that the bank might consider future “interventions” if the situation did not stabilise.
In the meantime, the soaring franc has caused panic on global markets, bankrupted foreign exchange traders as far away as New Zealand, and was seen as a significant threat to Switzerland’s export-dependant economy.
The Swiss stock exchange’s main SMI index has plunged more than 14 percent since Thursday’s announcement.
The decision is also expected to deliver a severe blow to the Swiss economy, with banking giant UBS slashing its growth forecast for this year to just 0.5 percent from its previous estimate of 1.8 percent.
The yield on Swiss 10-year bonds has meanwhile entered negative territory for the first time, with the result that lenders will now have to pay to lend money to the country.
– Feared losing control –
“The strong franc is threatening the entire Swiss system,” the Tribune de Geneve daily said Saturday, adding: “The future looks dark.”
Jordan said Switzerland’s central bankers had unanimously agreed to scrap their long campaign to hold down the franc after determining that continuing put the bank at risk of “losing control of its monetary policy in the long term.”
“We were aware that this decision could have a major impact on markets,” he said, while adding that “the markets should gradually stabilise — (although) it could take time.”
The SNB had been defending the exchange rate floor since September 2011 in an effort to protect the country’s vital export and tourism industries.
It has bought massive quantities of foreign currencies to do so, allowing its euro reserves to balloon tenfold in just four years.
The rate was introduced as the eurozone crisis sent investors scurrying to the safe haven currency. More recently, the Russian ruble crisis put renewed pressure on the franc.
Jordan insisted that the efforts to rein in the franc were no longer justified since the Swiss economy was far more robust than in 2011.
“We gave the Swiss economy time to adapt to the new situation,” he said, stressing that “the currency cap from the beginning was supposed to be an exceptional and temporary measure.”
“It was always meant to be abandoned.”
– SNB not all-powerful –
Now that the cap was gone, Jordan acknowledged that “the economic situation in Switzerland is more difficult.”
But, he noted, “SNB cannot fulfil all wishes with its monetary policy. It is not all-powerful.”
His comments were unlikely to win over Swiss businesses bracing to see exports plunge and shoppers at home flood across to neighbouring eurozone countries for cheaper goods.
“Making products in Switzerland and selling them abroad is currently the worst possible scenario,” Syz analyst Jerome Schupp told TDG.
The boss of a small watchmaking company, H. Moser & Cie, underlined the impact of the SNB’s move in an open letter to Jordan, warning that he may have to move his business to Germany.
“Over 95 percent of our watches are sold to people outside of Switzerland, and the first retailers called the same day to cancel orders,” Edouard Meylan wrote.
Switzerland’s tourism industry, already hit by a lack of snow, was also bracing for mass cancellations as already pricy ski resorts suddenly became far more expensive for foreign visitors.
Tourists arriving in Switzerland on Friday were less than thrilled.
“With an exchange rate like that, we won’t be coming back to Switzerland anytime soon,” a Scottish tourist in his 60s who gave his name only as Bornsadi told AFP as he arrived at the Geneva airport Friday for a week’s holiday. -AFP