The Swiss National Bank: Swiss Economy’s Guardian

As people living in Switzerland, we all own some Swiss Francs. We spend it to buy our favourite snacks, we save it to afford that new game console that we wanted for so long and we exchange it for other currencies when we travel abroad (not so much during the coronavirus pandemic but you get the point). Interestingly, for something we use on a daily basis, we do not think about the minutiae of money: where does the supply of money come from, why is the money we use even accepted as a unit of trade or why does our money’s worth stay relatively constant in terms of the other major currencies around the world? The answer to all of these questions is the Swiss National Bank (SNB). 

The SNB has various roles, ranging from determining the policy interest rate in Switzerland to buying and selling bonds in order to control the money supply within the currency market. A central bank such as the SNB aims to reach certain macroeconomic goals through set policies called monetary policies. In the SNB’s website, they state their main mandate as: 

The Swiss National Bank (SNB) conducts the country’s monetary 

policy as an independent central bank. It is obliged by Constitution 

and statute to act in accordance with the interests of the country 

as a whole. Its primary goal is to ensure price stability, while 

taking due account of economic developments. In so doing, 

it creates an appropriate environment for economic growth.” 


One way that the SNB ensures that Switzerland’s economy can continue to grow is to keep Switzerland’s export industries competitive. One key determinant in the competitiveness of a country’s export industry is its currency and how much it is worth in terms of other currencies around the world. Since the European Union is one of Switzerland’s biggest trading partners, it is worth looking at the Euro-Franc exchange market. On the 29th of November, the Swiss Franc (CHF) reached its highest point against the Euro (EUR) at 1.0426. In the course of two months, the EUR/CHF rate dropped from 1.0929 to the new low point. Although the change seems to be very minor when looked at from a unit-to-unit perspective, this change becomes much more major when looked at the higher numbers at which big transactions of money are made (imagine converting 100 million Euros to Swiss Francs: That is a drop of 5 million Francs!). The SNB is known to have been intervening in the EUR/CHF foreign exchange market since the 2008 Financial Crisis. The central bank’s objective has been to prevent the appreciation of the Swiss Franc against other major currencies, including the Euro. In economics, the Swiss Franc would be an ideal example of a managed currency: a currency whose value is aimed to be kept at a certain level through various government and central bank interventions. The SNB has accomplished this through two sets of interventions: keeping very low interest rates (as of September 2021, the policy interest rate is at -0.75% which means that technically you pay the SNB to lend your money to them) and buying up foreign currencies by supplying Swiss Francs in return. The interest rate has been in the negative range for many years, and is used as a big but rough adjustment of the exchange rate. The fine tuning that the central bank desires is done through the adjustment of Switzerland’s foreign currency reserves. According to the official website of the SNB, Switzerland holds an impressive total of around CHF 992,180,000 in foreign reserves. 38% of this reserve consists of the American Dollar while another 38% consists of the Euro. Seeing Switzerland’s insistent attempts in preventing the appreciation of the Swiss Franc, one might ask why does Switzerland not want its money to be worth more against other currencies? After all, wouldn’t our summer trips to the warm Mediterranean beaches be much cheaper? The answer lies in the contribution of Switzerland’s export industry to its GDP. The World Bank cites Switzerland’s exports valued at CHF 290,413,122 which is equivalent to 66% of Switzerland’s GDP (it is important to note that this percentage is not for the net export value), which is a considerable sum of income for the nation. 

Now is the time to ask how the currency exchange market affects countries’ imports and exports. Before going deep into the economics behind it, we have to keep in mind the sacred assumption made in economic theory: ceteris paribus. This phrase can be defined as ‘assuming that everything else is kept the same’. This means for the sake of understanding the theory, we have to think of all factors that might also affect imports and exports as constant. Now, here is the way it works: many countries, each using their respective currencies, import goods from Switzerland, ranging from pharmaceutical goods to watches to the beloved Swiss chocolate. In order to import these goods from Switzerland, these countries have to convert their currencies into the Swiss Franc by supplying their own currency in exchange since Swiss firms trade in Swiss Francs. If the Swiss Franc was to appreciate greatly, then these countries who import goods from Switzerland would have to supply more of their currency to buy the same amount of goods and/or services since the domestic price within Switzerland would not change. Something that might cost 500 CHF and let’s assume that this is equal to 475 Euros (note: these are not actual figures). If the Swiss Franc was to appreciate by 5% throughout one year, then by the end, European importers would have to pay 498 Euros to import the same goods. That is 23 Euros more than they would have to pay a year ago! Since the imports have become more expensive for the importing countries, this would force them to import less of the goods (per the law of demand) or incentivize them to find cheaper substitutes. Either way, Swiss firms will see their export revenue decrease since they will be selling less of their goods.

From this, it is possible to see why the SNB is reluctant in letting the Swiss Franc appreciate against other major currencies. You might not be surprised to hear that the Swiss Franc is not alone as a managed currency, as almost all currencies in the world have some government intervention behind its exchange rate. The Euro, Japanese Yen, U.S. Dollar and the British Pound are some examples of managed currencies in the world. Different from the rest, the SNB is trying to be kept at a firmly constant level in order to advantage Switzerland’s exports. Managing the currency to the extent that Switzerland has done has its consequences. In December 2020, the United States Treasury Department (USTD) labeled Switzerland a ‘currency manipulator’. As the name suggests, Switzerland has been accused of keeping the Franc’s value artificially low. A country needs to meet three distinct criteria to be considered as a currency manipulator according to the USTD: it must have a $20 billion surplus in bilateral trade with the United States, foreign currency intervention exceeding 2% of the country’s gross domestic product (GDP) and a global current account surplus exceeding 2% of its GDP. Under the United States 1988 Omnibus Foreign Trade and Competitiveness Act, being labelled as a currency manipulator by the USTD leads to the United States government to request formal bilateral meetings with the related country to restore the balance of payments (money flowing in and out of that country) in order to prevent the unfair disadvantage that the manipulator holds. The USTD’s decision came just as the coronavirus was about to show its presence in China’s Wuhan region two weeks later.

As we saw throughout the year, the global pandemic has created panic throughout the world currency market, leading many individuals to move their assets to Switzerland, a country known as a ‘financial safe haven’. This further pushed up the value of the Swiss Franc as many people converted their money into Swiss Franc in order to store their assets in Swiss banks. Up until this month, Switzerland was able to keep the Swiss Franc at a relatively fixed rate in terms of the Euro. As I write this article, that is not the case anymore. The Swiss Franc rose just about 5% against the Euro, between September and December 2021. The SNB’s attempts to fix the Swiss Franc at 1.09 per Euro could not overcome the huge push brought in by the “safe-haven move” during the pandemic. 

As the ‘consumers’ (although I don’t like that word since it has the connotation of having the duty to consume for the sake of doing it, which is an unsustainable practice) in the economy, we only see the effects of such exchange rate changes when we buy import goods or when we travel to other countries and have to convert our money into other currencies. It seems that, at least within the near future, SNB does not plan on stopping to intervene in the major Swiss Franc currency markets. One major implication of the SNB’s policy is the prevention of certain countries (especially countries with infant industries) from being competitive in the industries that Switzerland dominates in. In a way, Switzerland is using its monopoly power to create a barrier of entry for countries whose export industry has not yet grown to become competitive (usually through the firms in those countries reaching the economies of scale and having invested adequately in research and development). It is up to both Swiss and the affected countries’ policymakers, and to the international organisations such as the World Trade Organisation, to take action to ensure that countries’ policies are within fair practices to allow for fair competition. As the 19th century economist and philosopher Adam Smith puts it: “In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.”