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Central banks: Switzerland ups the ante

Radical shift in Swiss National Bank’s monetary policy sparked talk that other central banks would join it in competitive devaluation race.

The Swiss National Bank’s announcement on March 12 that it was taking drastic steps to breath life into its economy ostensibly signalled a new era of exchange rate management by one of the main central banks. Most market participants had expected the SNB to cut its key interest rates to virtually zero, add extra liquidity through additional repo operations and even possibly introduce quantitative easing. But few, if any, had predicted that the central bank would intervene in the foreign exchange market and actively seek to weaken the Swiss franc.

According to Bank of America/Merrill Lynch, the SNB’s actions have reiterated the central bank’s reputation for actively managing the Swiss economy. "The Swiss National Bank again lived up to its reputation," the bank writes in a research note, adding: "With a mere 0.25% target for the three-month Libor, the SNB’s rate policy has now hit the trough. In line with the SNB announcement, we look for aggressive quantitative easing through the purchase of Swiss franc private bonds and of foreign currency. The SNB has stayed ahead of the curve. We believe the SNB is – again – setting an example for the much less agile ECB [European Central Bank] next door."

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