"Very recently, we've had announcements of two changes in monetary policy that are actually different and could be more significant over the longer run as we think about how we thought about monetary policy just four or five years ago, " Governor of the Bank of Israel Prof. Stanley Fischer has told a conference in Prague to mark the 20th anniversary of the founding of the Czech CNB National Bank and the independent Czech currency. "Those two changes are the Fed's announcement of a quantitative target for a real variable, namely the unemployment rate, and secondly, the Swiss National Bank's decision to set a lower bound for the exchange rate and to be willing to defend it with apparently unlimited intervention."
On the second of those two changes Fischer said, "The Swiss National Bank announced that it is willing to buy infinite amounts of foreign exchange, of Euros in their case, in order to prevent the exchange rate from becoming more appreciated than 1.20 which is a number they fixed the exchange having declined to 1 at some point."
He observed, "Well, we all say you can't fight the market, that's a good story. You can fight the market, if the market wants your currency to appreciate, because if your currency is appreciating what the market wants is your currency."
"Namely, I'll talk in shekels because that's what I thought about. People want to come in to the country and buy the domestic assets, buy domestic currency and so you can produce shekels, we can produce shekels in very large amounts. We sterilize them, we sterilize the shekels by immediately selling short-term paper. But we have that, you can keep doing it forever. It will be very expensive when you've issued all this paper to neutralize it, but you can do it. And the Swiss, having tried everything else, got themselves into a position when initially the country was mad with them for losing money by having intervened in the foreign exchange market, and then was mad at them because the exchange rate kept appreciating when they didn't intervene, and so they decided then they would be able to intervene and they came up with this new policy. Now, they bought a lot of currency. They bought within a period of less than a year about 50% of GDP, that's a lot."
"I think the Swiss National Bank has the record for the rate of increase as a share of GDP of its assets. Now, isn't this a big problem, isn't it losing lots of money, isn't the carrying cost much greater than the benefit? Well, the answer is the carrying cost is negative, Swiss interest rates are lower than interest rates in the EMU so they're not losing on the carry. Are they going to have a loss when the market eases up? Well, they'll need the Swiss franc to depreciate against the Euro for them to make money on the price. They believe that 1.20 is not the equilibrium rate, they believe the equilibrium rate is well above that and at least in the last few days the market has been working in the direction of their making a profit."
"So this was a pretty amazing step. As you all know, the Swiss are extremely conservative, well this was not extremely conservative, this was extremely not conservative and so far, it's working."
Fischer's praise of the Swiss is highly significant as the shekel continues to strengthen against the dollar and speculation grows that the Bank of Israel will again sell large amounts of shekels to help exporters.
Fischer also praised the US Federal Reserve, "I think the Fed’s giving numbers to both the inflation and the unemployment targets, albeit they are not permanent targets, is the more important of those changes and that over the years to come we may well see impacts of this in the way central banks’ tasks are defined and in the way the policy makers, the non-monetary policy makers, congresses, parliaments and governments relate to the central banks."
Published by Globes [online], Israel business news - www.globes-online.com - on February 10, 2013
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