The SNB’s “Bold New Approach to Monetary Policy”

Check the box which best describes the exchange rate regime you want to operate,

¤ Fixed peg to Euro /USD/Other – Yes, I like ECB/Fed/Other monetary policy so I am going to let them do it for me

¤ Floating rate – No thanks, I will conduct monetary policy myself

In 2011, the Swiss National Bank emphatically checked the first box when they decided to peg the “Swissy” to the Euro. Yesterday, however, the Swiss National Bank changed its mind and decided to check the 2nd box instead. The simple choice between exchange rate regimes determines just about everything for a Central Bank – it is a decision to either outsource or insource monetary policy. It is therefore a fundamental policy decision, and flicking the switch twice in three years is astonishing.

In 2011, I doubted that the SNB was so enamoured with the ECB that they trusted Frankfurt with the monetary affairs of Switzerland. It seemed to me that the move was more like a capitulation trade. That is, the relentless attack on the Swiss banking system by Europe and the US was leading the Swiss authorities to abandon their independent banking system. Opting to peg to the Euro was the first step toward joining the EU and ultimately adopting the Euro. Surrendering the Swiss financial system to the hungry tax economies in Europe and the US was unfortunate but understandable. (1)

But this was apparently not the case. According to the SNB, the peg to the Euro had always been a ‘temporary’ decision. They liked the ECB’s monetary policy at the time, but now the SNB want to run their own shop for a while…

So what are we to make of the SNB’s schyzo box checking? Casually switching from floating to fixed to floating exchange rates, is at best a ‘bold new approach to monetary policy’ and at worst cause for alarm. Maybe pegging to the oil price will be next, or gold or the Rouble or the Zimbabwean dollar?

(1) Foreign investors had continued to pour money into Swiss bank accounts, causing reserves to swell from $250B to $500B (in itself not a bad thing). Clearly, private investors saw value in the “Swissy” that its own masters did not.