Not just the euro, but the Swiss franc, too, had been losing ground against the US dollar. In contrast to summer 2011, when the Swiss franc had been significantly overvalued against all other currencies, by the time of the discontinuation, Swiss franc strength had given way to euro weakness. The increasingly divergent monetary policy stances of the Federal Reserve and ECB were also putting pressure on the minimum exchange rate against the euro. The SNB was forced to intervene in the foreign exchange market on an ever larger scale. This was reflected in the monetary base (the volume of liquidity created by the SNB), which had expanded in several surges since 2009 and was now rising sharply again (cf. chart 4). Given the changed international environment, the minimum exchange rate of CHF 1.20 per euro was no longer sustainable. The SNB could only have enforced it through ongoing foreign currency purchases of rapidly increasing magnitude – in an environment where there was no prospect of a long-term stabilisation on the exchange rate front. Delaying the decision to discontinue would not have mitigated the economic consequences, but the losses for the SNB would have been far greater. This would have compromised the SNB’s ability to fulfil its mandate in the long term and would have undermined its independence in matters of monetary policy. Monetary policy since the discontinuation of the minimum exchange rate Developments since the minimum exchange rate was discontinued have confirmed our assessment at the time. The euro continued to weaken against the US dollar.
Floating exchange rates allow a country to pursue its own, independent monetary policy; however, the disadvantage of such an approach is that it can result in major (nominal and  2  BIS central bankers’ speeches  real) exchange rate fluctuations. A country’s currency may thus be substantially under or overvalued – sometimes for considerable periods of time. The problems associated with both fixed and floating exchange rates mean that, time and again, central banks have been on the lookout for compromises. Since the end of the Bretton Woods system, the SNB has twice introduced a temporary exchange rate floor in order to cap Swiss franc appreciation: first in October 1978 against the German mark, and latterly in September 2011 as a minimum exchange rate against the euro. The minimum exchange rate as a monetary policy instrument When a central bank announces a minimum exchange rate, it commits to enforcing a floor, if necessary by means of foreign currency purchases. Such a policy is designed to cap a currency’s appreciation. The minimum exchange rate is not conceived as an instrument for fine-tuning the exchange rate. Rather, it is intended to give guidance to the markets in a period of extreme uncertainty and to reduce excessive appreciation. However, a minimum exchange rate is not a long-term instrument. This is especially true in a country like Switzerland which has lower long-term average inflation rates than most countries and a currency that has appreciated consistently over the decades – both in real and nominal terms.