Swiss National Bank ends era of foreign currency purchases

The Swiss National Bank sold 5 million Swiss francs ($5.1 million) worth of foreign currency in market interventions in the second quarter of 2022, data on Friday showed, ending an era of heavy foreign currency purchases to curb the franc's gains.

Since scrapping its minimum exchange rate in 2015, the SNB has spent 353 billion francs buying mainly dollars, yen and euros to stem the appreciation of the safe-haven currency.

The halt to foreign exchange purchases is the second sea-change in SNB policy recently, with the central bank also quitting its near eight-year era of negative interest rates last week to fight resurgent inflation.

"The SNB is now operating in a new environment," said Elias Hafner, a foreign exchange strategist at Zuercher Kantonalbank. "The willingness at the SNB for interventions is now much lower."

At its peak in 2020, the SNB spent 112 billion francs to prevent inflows from investors worried by the COVID-19 pandemic sending the franc higher. The figure is larger than the entire economic output of Kenya.

But since then the central bank has shifted its focus away from the franc towards tackling inflation, which reached a 29-year high in August.

Albeit modest in international comparison at 3.5%, the Swiss level is outside the SNB's target for price stability which it defines as annual price rises of 0-2%.

Higher inflation abroad has also reduced the impact of the franc's appreciation for Swiss exporters, while the currency's strength has been a handy weapon against elevated prices from imported products.

The SNB declined to comment on Friday on its operations, although Chairman Thomas Jordan said last week if the franc were to weaken the SNB would consider selling foreign currencies.

SNB TEST

Selling foreign currencies was a "new element" in the SNB's approach, ZKB's Hafner said, with the central bank preferring a stronger currency in the current inflationary environment.

However, economists did not think the 5 million francs of foreign exchange sales should be seen as the SNB supporting the franc, or the start of reducing the bank's massive foreign currency holdings, which stood at 911 billion francs at the end of June.

"I don't think that we should interpret these sales as a monetary policy measure, as the amount is too small to have any impact," said Credit Suisse economist Maxime Botteron.

Instead the sales could be a test of the SNB's operations, he said.

SNB governing board member Andrea Maechler said this week she was not for now looking to actively shrink the SNB's balance sheet.

Karsten Junius, an economist at J Safra Sarasin, said the interventions had been successful, keeping inflation within the SNB's target for most of the time, while Swiss unemployment stayed lower and GDP growth higher than neighbouring countries.

He expected the bank to carry out foreign exchange sales in more quarters.

"The hurdle is lower for interventions to strengthen the franc," he said. "Only excessive CHF strength in too short a time would trigger interventions against it," he said.

"The base case is the other direction. A too weak CHF would be met by FX sales by the SNB as a stronger CHF helps to keep inflation low."

($1 = 0.9766 Swiss francs)

(Reporting John Revill and Michael Shields; Editing by Paul Carrel, Maria Sheahan, William Maclean and Emelia Sithole-Matarise)