The Swiss National Bank’s governing council has today been deliberating on what to do to protect Switzerland from events in the eurozone.
Since September, the SNB has capped the franc’s gains against the euro at Sfr1.20 after a massive currency appreciation raised the chances of deflation and a recession in the Swiss economy.
Until recently the floor held without too much bother. But in the past month or so the SNB has been forced to up its game, spending tens of billions of francs in May buying euros. If the SNB losses its nerve and speculators force the franc below the floor, then the interventions could lead to substantial losses, potentially resulting in more political pressure for the central bank.
We will find out at around 8.30am London time tomorrow what the governing council decides to do. But these are the main options open to them.
As the FT’s economics editor Chris Giles and chief regulation correspondent Brooke Masters write here, Paul Tucker’s speech on Tuesday evening was a blatant attempt to convince the Treasury that he’s their man to replace Sir Mervyn.
Paul Tucker, deputy governor of the Bank of England, distanced himself from Sir Mervyn King – whom he is favourite to succeed as governor – by calling on Tuesday for a review of the bank’s stance against directly easing credit conditions…
…The willingness to think again about credit conditions will please the Treasury, which has been frustrated over BoE unwillingness to consider policies to loosen credit constraints for households or small companies.
Beyond the politicking, Mr Tucker also makes an interesting point about why quantitative easing hasn’t been nearly as effective as the Bank had hoped.