Switzerland's central bank turns on printing money again

The Swiss central bank again turned on the proverbial money printing press in December to maintain the exchange rate against the euro, according to reports Bloomberg. Due to the weaker euro, the central bank has to intervene again to maintain the desired exchange rate of at least 1.20 Swiss francs per euro.

In September 2011, the Swiss National Bank (SNB) decided that the value of its currency could not rise beyond 1.20 Swiss francs against the euro. The European debt crisis then erupted in full force, causing a lot of capital to seek safety in the Swiss franc. The rapid appreciation of the Swiss currency that followed caused problems for large exporting companies in Switzerland. Their export position deteriorated to such an extent that the central bank felt compelled to intervene in the foreign exchange market.

The intervention consists of the 'printing' of new francs, with which the central bank buys euros and dollars. For example, the supply of francs and the demand for euros and dollars is increasing, causing the Swiss currency to depreciate against the euro and the dollar. As a result of these interventions, the SNB's balance sheet total has exploded in a few years from 100 billion francs at the beginning of 2008 to 500 billion francs at the beginning of 2013.

Balance sheet total Swiss central bank continues to grow

Intervening on the foreign exchange market

Now that the euro is under pressure again, the Swiss central bank is intervening again. In December, the total foreign exchange reserve grew by 32.4 billion francs to a new record of 495.1 billion francs. "Especially in the first half of December, the pressure on the Swiss franc ceiling was very high," BNP Paribas economist Evelyn Herrmann told Bloomberg. "Geopolitical tensions, especially the situation in Russia, was cited by the Swiss central bank as the main reason for fleeing to the safety of the Swiss franc," she added.

The Swiss franc has already lost a lot of luster over the past twenty years. In 1996 the peg with gold was abandoned, in 2011 the currency was devalued by 9% in one day due to the intervention of the central bank and at the end of last year the central bank introduced a Negative deposit rate. With all these measures, the central bank is trying to make it clear that its currency is not meant to be a means of saving.

Currently, the Swiss central bank holds 45% of its total foreign exchange reserves in euros and 29% in US dollars. The central bank also has a few percent of its currency reserves in Japanese yen, Canadian dollars and British pounds. The following chart shows that the composition of the SNB's foreign exchange reserves has changed significantly with the advent of the euro. In 1997, almost 80% of reserves were denominated in US dollars, but by 2000 that share had been reduced to about 40% of the total in favour of the euro.

Composition of foreign exchange reserves of the Swiss central bank