The SNB’s reserves are too volatile to finance the state, says Thomas Jordan

During a presentation at the University of Lucerne, the president of the national bank emphasized the importance of his institution’s independence for the proper performance of its price stability mandate.

The recent weak financial performance of the Swiss National Bank (SNB) offers the chairman of its general management, Thomas Jordan, an additional argument to defend his institution’s independence in relation to political circles. During a presentation at the University of Lucerne, Switzerland’s chief central banker reiterated the importance of this independence for the proper execution of the SNB’s price stability mandate.

The issuing institution has certainly created an evolving framework to redistribute reserves built up during good years, but these payments are capped at six billion francs a year from 2021, compared to 2 billion from 2016 and then 4 billion from 2019.

The 103 billion accumulated at the end of last year led some observers to overestimate the SNB’s potential for redistribution and to consider their ceiling too low, J. Jordan says in the script of his speech.

However, these profits have come down to a trickle during the first six months of the current financial year. Falling stock prices and rising interest rates around the world have hit the performance of stocks and bonds held by the SNB, creating a colossal deficit of 95 billion.

Mr. Jordan regards this as a demonstration of the importance of limiting and staggering any redistribution into the Confederation and cantons, rather than a single and complete transfer of reserves.

The first anti-inflation measures from the end of 2021

When we return to monetary policy strictly speaking, the central banker assures us that since the end of last year, his institution has responded to inflationary pressures that were already increasingly manifested abroad. The SNB decided during its review of the situation in December that a certain appreciation of the franc, which had been opposed for a long time, could be tolerated from now on. This phenomenon actually dampens the increase in import costs and consequently limits general price growth.

However, the 3.5% inflation rate recorded in August is well above the 0% to 2% range considered synonymous with price stability. Two successive hikes in the key rate of 50 and then 75 basis points, decided in June and then in September – bringing it to 0.5% – may prove insufficient to limit this price rise, and the SNB is not ruling out that he will have to again in the medium term.

Although it now has some leeway, the franc’s valuation remains closely watched by the institution, which reserves the right to influence its appreciation by increasing or releasing its substantial foreign exchange reserves.

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