Oops they did it again…

Never let it be said that central banks are making up policy on the hoof… Here is a report this weekend from a Swiss newspaper that the SNB have a new plan for the Swiss Franc:

the paper said the SNB was operating “a kind of minimum exchange rate against the euro”…”The talk is of a ‘corridor’ from 1.05 francs to 1.10 francs

They go on to claim that a source suggested the SNB would incur losses of up to 10bn francs in its pursuit of this policy (Blondemoney hesitates to use that word).

Questions? Plenty:

1. The floor at 1.2000 didn’t work, why would a corridor?
2. Why wouldn’t EUR/CHF spend almost all its time at the bottom of the corridor, with it becoming a de facto floor?
3. The SNB defended the floor because it committed to “unlimited” intervention. Now it’s suggesting it’s only prepared to intervene up to a loss of 10bn CHF. How is that going to be more credible intervention?
4. How can a central bank admit that it is prepared to make such a loss?

So, it’s prepared to intervene less; to take a loss; and to try to keep EUR/CHF within a band.

If their credibility wasn’t already shot to pieces by the failure to maintain the 1.2000 floor, how is this going to restore it??

How is this going to stop people from thinking that perhaps in a few months time they decide they want a wider corridor? Or to manage the CHF against a basket of currencies, a la Singapore (which the SNB’s Danthine himself admitted “deserved closer examination”)? Or maybe let’s just run up a 10bn CHF loss and then decide?

Of course, there has been plenty of hedging activity from the locals since the floor disappeared, and perhaps this kind of leak is to entice them to jump in even more with their EUR/CHF buying, to act as a de facto stabiliser for the currency. But that’s just a short term solution.

Bigger picture, the central bank emperor’s new clothes are becoming ever more noticeable. Hark back to the words of the BOE’s Ben Broadbent from his speech in October last year:

 ‘Whatever does cause a sustained rise in real interest rates – a lasting solution to the arrangements of the euro area, perhaps , or renewed optimism about global productivity growth – it is unlikely to be the arbitrary whim of central bankers . Those betting on long-term movements in interest rates will have to work a little harder than just listening to people like me.’

The trouble is, the decline in inflation means we HAVE to listen to the central bankers, because they keep throwing in new easing surprises. Six months ago all the talk was of exit, but a fall in the (allegedly exogenous) oil price has thrown up the spectre of deflation, leaving central bankers no choice but to meddle. As the BOJ official said, the constant call for more easing derives from an obsession to avoid ‘Japanisation’ – whereas in fact the answer lies in structural reform.

This week we may see easing from Australia on Tuesday and from Turkey on Wednesday – the former due to a commodity-led growth slowdown and the latter due to political motivations. If we get both then the “any excuse to ease” policy is alive and well. Once again, Blondemoney hesitates to use the word ‘policy’ in this environment… at some point this year the market will stop being spoon fed by central banks and realise the positive element of all the recent monetary easing and disinflation shocks.

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