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2024-04-09 – Martin Schlegel: Interest rates and foreign exchange interventions: Achieving price stability in challenging times

For decades, the exchange rate has played a key role for the Swiss economy and for the Swiss National Bank's monetary policy. However, it was only with the global financial crisis in 2008/2009 that the SNB started to intervene in the foreign exchange market on a large scale.
Foreign exchange interventions were necessary to achieve the SNB's mandate of price stability. To maintain price stability, the SNB influences monetary conditions - primarily by setting the SNB policy rate as well as by intervening in the foreign exchange market if necessary.
The SNB has used foreign exchange interventions both in phases of low and high inflation. It purchased foreign currency between 2009 and 2021 to counteract deflation risk when the policy rate was close to its effective lower bound. Without these purchases, inflation would have been even lower.
When inflation surged after the coronavirus pandemic, the SNB sold foreign currency to tighten monetary policy. Foreign currency sales complemented policy rate hikes and dampened imported inflation in particular. This policy mix succeeded in bringing inflation back into the range of price stability.
There are, however, side effects to foreign exchange interventions. The foreign currency purchases resulted in a significant expansion of the SNB's balance sheet, which in turn led to an increase in the volatility of its annual results. The SNB therefore needs to hold sufficient capital to bear potential losses.

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