Swiss Central Bank Chief Warns of Limits of Monetary Policy

Feb 23 2016 | 9:14pm ET

By Michael Shields and John O'Donnell (Reuters) - There are limits to how loose monetary policy can be, the head of the Swiss National Bank said on Tuesday, comments that sent the value of the franc rising.

Some say 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."

He 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 program 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.

"Money policy alone won't solve the problem," said Jordan, adding, however, that he remained willing to intervene in currency markets if needed.

Jordan said the Swiss National Bank's policy of negative interest rates, which charges lenders for parking cash at the central bank, and currency market intervention was working although this too had limits.

"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."

"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 traded around 1.0930 on Tuesday.

"Foreign exchange market interventions and quantitative easing programs carry with them the increasing risk that a central bank's ability to conduct monetary policy may be compromised in the long term," he added.

Jordan had 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 safe-haven currency.

His comments echoed those earlier of Swedish central bank Deputy Governor Martin Floden, who said cutting already negative interest rates further may not have much effect.


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