Swiss central bank to continue capping franc

The Swiss National Bank is continuing its policy of maintaining a lid on the value of the Swiss franc by intervening in currency markets to ensure that the euro does not drop below 1.20 francs.

Swiss central bank to continue capping franc
Swiss National Bank Chairman Thomas Jordan (Photo: SNB)

The central bank’s chairman Thomas Jordan reiterated the policy on Thursday at a press conference in Bern.  

“The Swiss franc is still high,” Jordan said.

“An appreciation of the Swiss franc would compromise price stability and would have serious consequences for the Swiss economy.”

Jordan said the SNB was prepared to buy foreign currencies in “unlimited quantities” to enforce the minimum exchange rate, which was first introduced last year after the euro threatened to drop to parity against the franc over concerns with economies in the eurozone.

He said the bank will continue to target low-interest rates, with the three-month Libor rate range between zero and 0.25 percent.

Assuming rates remain low, the Swiss franc should weaken over the next three years, Jordan said.

The central bank expects Switzerland’s inflation rate will be minus 0.7 percent for 2012 and for the foreseeable future “there is no risk of inflation”, he said.

The bank is forecasting a significant weakening of economic growth in the fourth quarter following an increase in the third quarter, with the overall increase in GDP for 2012 expected to be one percent.

This comes against a background of persisting weakness in the euro area and despite some growth in the US and emerging economies, Jordan said.

The Swiss economy should grow between one and 1.5 percent next year, he said.

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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?