SNB’s Furious Crisis Response Is Happening Behind the Scenes

(Bloomberg) -- The Swiss National Bank looks like an oasis of calm compared with other central banks, but behind the scenes it’s been waging a furious battle with investors.

Unlike in the U.S. and the euro area, President Thomas Jordan and his colleagues haven’t responded to the shock of the coronavirus by cutting interest rates or conjuring up new emergency asset programs. Their policy rate has been unchanged, and will probably stay at -0.75% this week.

Instead, they’ve ramped up currency interventions, selling the franc at the fastest pace in years to stem its advance. Its haven status saw it appreciate to a five-year high against the euro last month, pushing down inflation and undermining exporters.

The strategy is not without risks, including possibly being labeled a currency manipulator by Donald Trump’s administration. The U.S. Treasury has already put Switzerland on a watch list and the next update is due shortly.

Even with that threat, “the SNB will continue to intervene,” said David Marmet, an economist at Zuercher Kantonalbank. “Lowering rates further would mean they counteract their other crisis measures to boost liquidity.”

The SNB launched a refinancing facility for government-backed loans to small and medium-sized businesses in March to encourage banks to keep credit flowing.

According to Jordan, the pandemic has caused “enormous” pressure on the franc. While the SNB says it can cut rates again if needed, interventions are doing the work so far.

Data suggest it’s already spent more this year than in 2015, when policy makers unexpectedly scrapped their cap on the currency, and the franc briefly touched parity with the euro.

The deposit rate has been at a record low since then, and the policy has been supplemented with interventions and officials’ refrain that the franc is “highly valued” to deter investors.

Economists in a Bloomberg survey expect the main interest rate to remain at its current level at least through 2021.

Although Switzerland’s virus outbreak hasn’t been as severe as in neighboring states, the economy has still taken a hit. In the country of 8.5 million, companies filed government furlough applications for more than a million workers, and unemployment is expected to rise.

“An appreciation of the franc would hit the Swiss real economy hard,” the KOF Swiss Economic Institute noted in its most recent forecast. “As such the SNB is setting strong monetary policy impulses.”

There’s been some relief for the SNB recently thanks to the announcement of a joint European Union recovery plan. The franc has weakened slightly again after pushing close to 1.05 per euro in mid-May.

But the currency is still stronger than it was at the start of the year. It’s averaged 1.06 in 2020, compared with 1.13 in the first half of 2019.

“Clearly the SNB was quite relieved by the fact that the franc went back to close to 1.09 per euro,” said Gero Jung, an economist at Geneva private bank Mirabaud & Cie. “They’ll continue with this two-pillar approach of negative interest rates and interventions.”

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