Monday, June 18, 2012

SNB Massively Increases Monetary Base to Maintain Currency Floor

The Swiss National Bank then announced that it was prepared to buy foreign exchange in unlimited quantities to maintain a floor of SF 1.20 vis-à-vis the euro. The Bank’s holdings of foreign exchange increased substantially, but the Swiss monetary base increased by even more. Since September, the Swiss National Bank has maintained an exchange-rate floor, by giving up control of its monetary base in conformity to the fundamental trilemma.
Read it at VoxEU
Foreign-exchange intervention and the fundamental trilemma of international finance: Notes for currency wars
By Michael Bordo, Owen F Humpage and Anna J Schwartz
(h/t David Keohane at FT Alphaville)

Previously I detailed that the Swiss are struggling to maintain the currency floor as SNB Foreign-Currency Holdings Hit Record On Intervention. Apparently purchasing significant sums of foreign currency is not the only questionable byproduct of maintaining a currency floor against the euro. By setting a currency floor, the SNB has also given up control over monetary policy and thereby had to mimic the ECB’s balance sheet expansion. Although the monetary base expansion poses little cause for immediate concern, these actions can have the effect of reducing current interest income to the private sector and making future interest rate targeting more difficult.

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