The Swiss shock…

There seems to be something brewing given two central banks made policy changes outside of their policy days. The disillusionment over growing powers of central banks is rising with every passing day. With governments in equal shambles, one does not know what really is the way out.

Swiss National Bank which had pegged its currency against expectations decided to remove the peg in a knee-jerk reaction. It also pushed the interst rates to a negative zone of -1.25% to -0,25%:

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%. It is moving the target range for the three-month Libor further into negative territory, to between –1.25% and −0.25%, from the current range of between −0.75% and 0.25%.

The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.

Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.

The SNB is lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions. The SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions. 

The markets went crazy to say the least given how sudden the move was. The idea was to let CHF depreciate but it appreciated. The stock markets nose-dived and created instability across world markets.

All across developed world, we are seeing two factors. One ignoring the basics of economy and just focusing on financial sector. Two allowing central banks to become bigger and bigger. The sheer power central banks have over both domestic and global economies has gone just too far. There was a time when all these central banks were praised for being savvy and saviours of their economy. Governments were largely ignored and real things that mattered were dumped.

Now, tide has turned and all things have become reverse. We really do not know the way out of all this.

Hopefully, other countries learn their lessons and not allow central banks to dictate and dominate economy. It all looks good till going is good and central bank supremos have some element of luck in his/her (most are his) favor. Several awards come during this period leading to further glorification of the image. When it all dries, we realise how false the whole notion was.  Countries are not shaped by what central banks do but how various firms, institutions and polity rally towards development of basic goals.  But as of now, the sheer obsession is only on what central banks do (and not do) including what color of ties they wear. Central bank appointments should be carefully done with the objective of making it a minimal organisation and not a maximial one as most have become.



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