What it means
The SNB's main job is to ensure price stability while taking the state of the economy into account. It defines price stability as inflation (the general rise in prices) staying below 2% a year.
It is independent of the government, which means it can make decisions about interest rates without political instruction. To steer the economy the SNB sets a policy rate, which anchors short-term borrowing costs in Swiss francs.
It also uses open market operations, in which it lends money to banks or takes deposits from them, and it can buy or sell foreign currency to influence the exchange rate. These tools matter for any business that borrows, lends or trades in francs.
The franc tends to strengthen when investors are nervous, because Switzerland is seen as stable. A strong franc makes Swiss exports more expensive abroad and cuts the franc value of overseas earnings, which squeezes exporters and the tourism industry.
The SNB has at times intervened to weaken the franc, and in September 2011 it set a minimum rate of 1.20 francs per euro. That floor was abandoned without warning in January 2015, and the franc jumped sharply within minutes.
The episode caught many traders and some foreign exchange brokers badly off guard, and it is often cited as a lesson in the risk of relying on a central bank commitment staying in place forever. The SNB also holds large reserves of foreign currency, gold and other assets, so its own results swing with markets.
It publishes a regular assessment of monetary policy and has a role in overseeing systemically important banks, meaning banks whose failure could damage the wider economy. For finance teams, the practical points are the policy decision dates, the stated inflation view and the SNB's attitude to the franc.
The SNB's decisions also reach well beyond Swiss borders because of the franc's role in global finance. Many European homeowners and companies borrowed in francs in the past when its interest rates were low, and they were hit hard when the franc rose against their own currencies.
Anyone with loans, revenue or costs in francs should therefore treat the SNB calendar as seriously as they would a local central bank's.
In practice
Real-world examples.
Example
A Swiss watch exporter sells most of its output in euros and dollars. When the SNB signals that it is comfortable with a stronger franc, the finance director increases the share of foreign currency sales that are hedged with forward contracts.
Example
A US importer of Swiss machinery pays its invoices in francs. The treasurer follows SNB policy announcements because an unexpected rate rise could strengthen the franc and increase the dollar cost of the next order.
Example
A Swiss mortgage broker explains to clients that variable-rate mortgages follow the SNB policy rate. When the SNB cuts, monthly payments fall within a few months, and when it raises, borrowers see them climb.
Case study
Seen in the real world.
Alpina Instruments is an illustrative, fictional Swiss maker of precision tools that sells 80% of its output abroad. Its costs are in francs, but most of its revenue arrives in euros.
When the SNB held its policy rate unchanged and commented that the franc was highly valued, the company's finance director assumed the currency would not rise much further. She left half of the next year's euro revenue unhedged to avoid paying the cost of forward contracts.
In the illustrative scenario the franc strengthened by 6% over the next nine months. On 40,000,000 euros of unhedged revenue, and an exchange rate of about 1 franc per euro, this cut franc income by roughly 2,400,000 francs, and the director revised the hedging policy so that at least 75% of expected foreign revenue is always covered. She also asked her team to circulate the SNB's published policy calendar to the sales department, so that pricing decisions are made with the next announcement date in mind.
Watch out
Common mistakes.
- Assuming the SNB is a part of the government, when it is an independent institution with its own mandate.
- Believing a central bank exchange rate floor is permanent, when the SNB's own 2015 decision shows it can be withdrawn.
- Treating a strong Swiss franc as good news for every Swiss business, when exporters and tourism operators are hurt by it.
Questions
People also ask.
What does the SNB target?
Price stability, which it defines as inflation below 2% a year, while taking account of economic conditions.
Why is the Swiss franc called a safe haven?
Because Switzerland has a record of political stability, low inflation and strong public finances, so investors buy francs in times of stress.
How often does the SNB announce monetary policy?
It holds regular assessments on a published schedule, and the dates are available in advance on its website.
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