Swiss Central Bank tricky situation

The Swiss National Bank (SNB) has taken unique steps among central banks, leading to a large balance sheet that’s hard to reduce. Unlike other banks, the SNB created new digital money to buy foreign currencies, then invested in global stocks and bonds. This unusual approach has a backstory.

For years, Switzerland had more money coming in than going out. This usually makes a currency stronger unless people invest abroad, which Swiss people did until the 2008 financial crisis. After that, bringing profits home made the Swiss franc too strong, risking deflation.

The SNB tried to fix this by lowering interest rates and setting a minimum value for the franc against the euro. But in 2015, they suddenly stopped this, causing the franc’s value to jump. This led to years of negative interest rates and more interventions, growing the SNB’s assets to about 140% of the country’s economic output.

Now, the SNB can’t easily shrink its holdings like other central banks. Their options – making bad investments or selling assets – are risky. In 2022, the bank lost 17% of the country’s economic output due to falling global markets and a stronger franc.

Selling foreign money to buy back francs could cause deflation. Even during high inflation, they only sold a small part of their holdings. With low inflation now, selling more could hurt the economy.

Other ideas include giving the money to Swiss citizens or creating a government investment fund. But these don’t solve the problem of a strong currency. The SNB must choose between more market interventions or letting the franc’s value change freely.

The U.S. accused Switzerland of manipulating its currency in 2020, but this didn’t stop the SNB from buying more foreign money in 2021. With a new leader coming in October, it’s unclear if the SNB will keep intervening or let markets decide the franc’s value. Both choices carry risks.