With people running away from European banks, and global investors nervous, they have been moving swiftly towards “safe” assets – such as the Yen and the Swiss Franc.
There has been sustained intervention in these currencies since late-July, but now the Swiss National Bank has gone a step further – they have set a minimum exchange rate. [Marginal Revolution also discusses here]
So they’ve pegged their currency to the Euro!
Not quite – they’ve set a cap regarding how high strong currency can be against the Euro. They’ve said in their statement that:
The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.
This is still, in a large part, consistent with an inflation targeting mandate – they have just said the following: “be aware that we are going to print money and buy up foriegn currency until our currency is back at a level that is consistent with our inflation mandate” – they have just identified a level of the exchange rate that wouldn’t carry the strong risks of deflation they are currently experiencing.
Furthermore, it seems apparent that the Swiss National Bank views the current level of the currency as a bubble – people running to saftey see the Swiss Franc as attractive, and people who want to invest expect this to continue, leading to a self-fulfilling expectation driving up the value of the Franc.
Now I’m not the biggest fan of messing around with relative prices in this way – as it could just be that Europe is so far in the toilet that the weak Euro is telling us something … as a result, my preference would be for the Swiss to just print a whole lot of money and buy currency without setting an explicit “target” in the way they have (outside of stabilising inflation rates).
My CONCERN is that this will lead to further exchange rate management around the world – although not as dangerous as protectionism, I can still see nasty side effects from this.
The real problems are in Europe – and they need to sort them out. However, given they won’t other countries are stuck introducing “second best” policies (with the potential for unintended consequences) which is sad.
In terms of NZ this means nothing – they are worried about an asset price bubble in currency markets due to people running to “low risk” currencies … we are the polar opposite 😉 . Also they are worried about deflation, we aren’t.