SNB reaffirms commitment to exchange rate limit

Thomas Jordan says Swiss economy continues to face 'major challenges'; Fritz Zurbrügg outlines efforts to control risks arising from the central bank's $475 billion foreign currency investments
Switzerland

Thomas Jordan, chairman of the Swiss National Bank (SNB), today stressed the central bank's continued commitment its exchange rate ceiling of Sfr1.20 to the euro.

At a press conference, Jordan said the SNB continues to face "major challenges". "In particular, the threat that the Swiss franc could suddenly come under upward pressure again has not been averted," he said.

The Swiss franc is currently trading at Sfr1.23 to the euro, and the central bank has not had to enforce its minimum exchange rate since September last year. Nevertheless, "the Swiss franc is still high", Jordan said – well above a low of 1.68 to the euro in October 2007.

Jordan said the majority of the risks Switzerland is currently facing originate beyond the country's borders. In particular, a slowdown in global growth "cannot be excluded", he said, while tensions, particularly in the eurozone, "can reappear at any moment". A reversal in sentiment could easily send investors fleeing back into the Swiss franc, forcing the SNB to make further foreign currency purchases.

Fritz Zurbrügg, a member of the SNB's governing board, noted that the current "risk-friendly market environment" was both holding down the value of the franc and affecting the management of the SNB's sizeable foreign currency reserves. According to the latest data on the SNB's website, at the end of April the central bank's balance sheet was dominated by Sfr444 billion ($475 billion) in foreign currency investments, in addition to Sfr46 billion ($49 billion) in gold holdings.

In the first quarter of 2013, Zurbrügg said, around 78% of the foreign currency investments were held in government bonds and deposits with other central banks. However, the central bank has been increasing the share devoted to equities. "To further diversify investment risk and increase investment in real assets, we raised our proportion of equities from 12% to 15% in the first quarter," he said.

The SNB has also started making investments in companies with relatively small market capitalisations, and broadened the range of countries it invests in, such that the portfolio "now covers all advanced economies", Zurbrügg said.

Gold accounts for another significant portion of the central bank's assets, but Zurbrügg was cautious with regard to its value as an investment. Although a useful diversification tool due to its tendency to move in the opposite direction to other assets, he pointed out that gold does not yield interest or dividends. "And as the recent months have shown, gold is also among the most volatile and therefore most risky investments," he added.

The SNB has made its feelings about gold clear in the past, after the Swiss People's Party secured enough signatures in April to trigger a referendum on the central bank's gold holdings. If passed, the proposed law would force the central bank to maintain 20% of its reserves in gold – an outcome that would "considerably hinder" the SNB in fulfilling its mandate, Jordan said in a recent speech. Since the 20% would be a minimum, the central bank would be lumbered with a highly risky, unsellable asset.

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