Central bank holds firm on key interest rate

The Swiss National Bank said Thursday that it would continue to keep the Swiss franc from gaining too much in value against the euro, as the SNP kept its reference interest rate close to zero.

Central bank holds firm on key interest rate

The Swiss National Bank stressed on Thursday it would prevent the Swiss franc from gaining too much in value against the euro, saying it was ready to act “with the utmost determination.”

The SNP maintained its target range for the franc’s three-month London interbank offered rate (Libor) unchanged at 0-0.25 percent, it said as policymakers sought to keep the franc from soaring against major counterparts.

A central bank statement said it was prepared to “buy unlimited amounts of currencies” to keep Switzerland’s money at a minimum of 1.20 francs to the euro.

Investors unsettled by the eurozone debt crisis and uncertain US economic prospects have flocked to a perceived safe haven in Switzerland, driving up the value of the franc to the detriment of Swiss exporters.

The Swiss currency gained 11 percent against the euro and 15 percent against the dollar between January and September 5, 2011, forcing the central bank to intervene on foreign exchange markets to stem its rise.

Meanwhile, the statement noted: “In Switzerland, there is no risk of inflation in the foreseeable future.

“The inflation forecast has even been revised lower since the last examination in December,” it said.

“The strength of the franc continues to present a challenge to the economy” however, even though the bank’s declared floor of 1.20 francs to the euro has held up so far, it added.

Switzerland’s economic situation has stabilized and the central bank expects the economy to grow by almost 1.0 percent this year.

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Why is the demand for 1,000-franc banknotes growing in Switzerland?

Large-denomination banknotes, like the 1,000-franc note, are rarely used for everyday transactions in Switzerland. So why are they becoming more popular?

Why is the demand for 1,000-franc banknotes growing in Switzerland?
The kind of banknotes the Swiss like to stash away. Photo by AFP

The demand for 1,000-franc notes has risen in the past months, data from the Swiss National Bank (SNB) indicates.

CHF1,000 converts to approximately €925.75, £824,63 or $US1126.98. 

Whether withdrawing the money from an ATM machine or directly from a bank, customers request large-bill denominations more often than before.

“We do know there is more cash being currently withdrawn in large notes, but it changes hands less often” Sarah Lein, a monetary policy expert from the University of Basel told SRF public broadcaster.

This means the money is not being spent but stashed away.

“We can conclude that some large notes end up in a safe”, she added.

READ MORE: Switzerland’s economy forecast to recover 'from summer onwards' 

The reason, she said, is that many banks charge their customers negative interests on large deposits.

“Therefore, it could be cheaper to simply withdraw the cash in large notes and keep it in a safe, especially since inflation has been extremely low for a long time”, Lein added.

This is not unusual — in times of crisis, more cash is often in demand.

But could this cause the shortage of 1,000-franc bills?

That is not likely to happen, Lein pointed out.

“Both the central and commercial banks have enough cash stored in their vaults to meet such demand. So there is always enough money available”, she said.

There is about 48.6 billion francs floating around in the form of 1,000-franc notes, constituting 59 percent of all Swiss notes in circulation. 

It is the world’s second-largest denomination after Brunei's B$10,000 note.

READ MORE: What do people in Switzerland spend their money on?