Swiss cen­tral bank chief warns of lim­its of money pol­icy

The Pak Banker - - FRONT PAGE -

Loose mon­e­tary pol­icy may be reach­ing its lim­its, the head of the Swiss cen­tral bank sig­nalled on Wed­nes­day, as he cau­tioned that it alone would not be enough to shield coun­tries from global eco­nomic prob­lems. Some see the com­ments, de­liv­ered by Thomas Jor­dan in Frank­furt, as a hint to the Euro­pean Cen­tral Bank, which over­sees the 19-mem­ber euro zone, that it should care­fully weigh any fur­ther loos­en­ing.

Equally, how­ever, they were taken by some in­vestors as a sig­nal that Switzer­land's ap­petite for fur­ther ac­tion of its own was fad­ing.

"The op­tions are not un­lim­ited," Jor­dan told an au­di­ence of stu­dents and academics. "The ef­fects of mon­e­tary pol­icy mea­sures can wane with du­ra­tion and dosage."

Jor­dan also echoed Swe­den in play­ing down the use­ful­ness of higher penal­ties on lenders by charg­ing "neg­a­tive rates" on those who hoard money with the cen­tral bank.

"In­ter­est rates can­not con­tinue to be low­ered into neg­a­tive ter­ri­tory with­out at some point pre­cip­i­tat­ing a flight to cash," he said, al­though he added later: "The fear that the in­tro­duc­tion of neg­a­tive in­ter­est will pre­cip­i­tate a flight to cash has thus far proved un­founded."

Swedish cen­tral bank Deputy Gov­er­nor Martin Flo­den had said that cut­ting neg­a­tive in­ter­est rates fur­ther would not have much ef­fect, sup­port­ing views that the Riks­bank may hold off on fur­ther pol­icy loos­en­ing.

Com­ment­ing on ac­tion by cen­tral banks around the globe, Jor­dan cau­tioned of the "po­ten­tial cost" of such loose money pol­icy while adding: "Mon­e­tary pol­icy can­not cush­ion the im­pact of ev­ery neg­a­tive de­vel­op­ment in the global econ­omy or the in­ter­na­tional fi­nan­cial mar­kets." His frank com­ments il­lus­trate that, af­ter years of rock bot­tom bor­row­ing costs and vast money print­ing around the globe, there is a grow­ing feel­ing among cen­tral bankers that they may have spent much of their am­mu­ni­tion.

The roll-out of a 1.5-tril­lion-euro money print­ing pro­gramme in the euro zone helped de­press the euro and strengthen the franc, re­quir­ing Switzer­land to em­bark on costly in­ter­ven­tions on the cur­rency mar­ket to stop the franc be­com­ing too strong.

Mon­e­tary pol­icy alone will not solve the prob­lem, said Jor­dan, adding, how­ever, that he re­mains will­ing to in­ter­vene in cur­rency mar­kets if needed.

Jor­dan said the Swiss Na­tional Bank's poli- cy of neg­a­tive in­ter­est rates and cur­rency mar­ket in­ter­ven­tion was work­ing al­though this too had lim­its. "The new (Swiss) mon­e­tary pol­icy stance is be­gin­ning to have an im­pact," he said, not­ing the franc had ac­tu­ally weak­ened over the past 12 months. "None­the­less, the Swiss franc re­mains con­sid­er­ably over­val­ued against the euro in real terms."

In Jan­uary 2015, Switzer­land's cen­tral bank shocked fi­nan­cial mar­kets by aban­don­ing a cap of 1.20 francs per euro it had de­fended for more than three years to shield the ex­port-ori­ented econ­omy from the pain of an over­val­ued cur­rency.

The euro plunged against the franc when the SNB cap was re­moved but has re­cov­ered this year to over 1.11 francs and was trad­ing around 1.0925 at 1610 GMT.

"For­eign ex­change mar­ket in­ter­ven­tions and quan­ti­ta­tive eas­ing pro­grammes carry with them the in­creas­ing risk that a cen­tral bank's abil­ity to con­duct mon­e­tary pol­icy may be com­pro­mised in the long term," Jor­dan said.

Jor­dan said ear­lier this month the SNB could push in­ter­est rates deeper into neg­a­tive ter­ri­tory, warn­ing that tur­moil in Europe could re­vive the franc's tra­di­tional role as a safe­haven cur­rency.

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