The encyclopedia · Finance & Accounting · Financial decision · 2011-2015
The SNB promised unlimited euro purchases to cap a soaring franc.
In 2011 the SNB set a 1.20 franc-per-euro floor and pledged to buy euros without limit, ending a safe-haven surge that threatened deflation.
Swiss National Bank
the move
In summer 2011 the franc soared as investors fled the euro crisis, and at one point it neared parity with the euro. The SNB warned that this overvaluation was an acute threat to the Swiss economy and carried the risk of deflation.
On 6 September 2011 it set a minimum exchange rate of 1.20 francs per euro and said it would enforce it with utmost determination, prepared to buy foreign currency in unlimited quantities. Within minutes the euro rose about 9% against the franc as the market tested, then accepted, the commitment.
The gambit worked because it changed expectations, not because the SNB spent freely at the start. By making the floor credible, it made defending it cheap, while relieving export pressure and buying room to fight deflation.
why it works
- The franc's rise was a violent one-way bet driven by euro-zone fear
- A floor at 1.20 was near the current level, so it was cheap to defend
- An open-ended promise is more credible than a partial intervention
- Cheap francs were damaging exporters and pulling prices down
what transfers
A reluctant or undersized intervention invites speculation; a clearly unlimited one can move the market with very little actual spending.
what came after
The floor held for more than three years and let the SNB fight deflation even as the euro crisis deepened. Defending it meant accumulating large foreign reserves, and when the SNB later abandoned the cap the franc jumped sharply, so the commitment proved expensive to reverse.
references
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