Central bank vows to restrain Swiss franc

Switzerland's central bank is pledging to continue to defend the franc's exchange rate floor against the euro, while maintaining its record low interest rates.

Central bank vows to restrain Swiss franc
Photo: Malcolm Curtis

The Swiss National Bank, which fixed a minimum exchange rate of 1.20 francs to the euro in September 2011, said on Thursday that it would "enforce this minimum rate with the utmost determination."
An SNB statement emphasised that if necessary, it was "prepared to buy foreign currency in unlimited quantities for this purpose."
The central bank had introduced the floor as fears of an imminent euro implosion coupled with concerns about soaring US debt levels, pushing investors to seek cover in the safe Swiss franc.

While the Swiss economy has remained a rare bright spot on the European map, the surging value of the franc created headaches for exporters, which have seen margins eroded by unfavourable exchange rates.
The franc has fallen recently amid a rosier outlook for the European common currency, sparking calls for the Swiss bank to remove its floor.

However, "the Swiss franc is still high," the central bank said.

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

The central bank also maintained its three month range on Libor rates —- a benchmark instrument used all over the world — at between zero and 0.25 percent, a spokesman said on a conference call.

In addition, the bank stood by its December forecast that the Swiss economy would grow by between 1.0 and 1.5 percent this year.

The SNB revised its inflation outlook for the year however, and now expects Swiss consumer prices to drop by 0.2 percent in 2013, compared with its previous forecast of 0.1 percent.

In 2014, the SNB now expects Swiss inflation to stand at 0.2 percent, down from its previous forecast of 0.4 percen due to the "gloomier outlook" in the European Union, and at 0.7 percent in 2015.

In the foreseeable future, "there continues to be no threat of inflation in Switzerland," the SNB 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?