Swiss central bank chief warns of limits of money policy
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.