While in the US expectations of an interest rate rise were mounting, there were signs of further monetary policy easing in the euro area from mid-year onwards. The euro subsequently weakened significantly against the US dollar. This in turn affected the EUR/CHF rate, which had already been close to the minimum exchange rate for some time. As a result, the Swiss franc largely followed the euro downwards. Nevertheless, at the mid-December monetary policy assessment, we were still convinced that the minimum exchange rate was the right instrument for ensuring appropriate monetary conditions. Shortly thereafter, however, the euro depreciation gathered pace sharply, and pressure on the franc increased dramatically. It became clear that a minimum exchange rate of CHF 1.20 per euro was no longer tenable. Only sustained currency market interventions of rapidly increasing magnitude would have allowed the SNB to uphold the policy. Faced with these fundamental changes in international conditions, we came to the conclusion that the minimum exchange rate could only have been maintained through an uncontrollable expansion of the balance sheet, potentially even to a level several times higher than Swiss GDP. The risks associated with such a balance sheet expansion would have been out of all proportion to the benefits for the economy. An uncontrollable expansion of the balance sheet would have severely impaired the SNB’s ability to conduct monetary policy in the future and jeopardised the fulfilment of its mandate in the long term. On the one hand, the future use of currency interventions would have been severely constrained.
Central banks in the advanced economies increasingly began to resort to unconventional instruments. At the SNB, these included long-term repos, purchases of Swiss franc-denominated bonds issued by domestic, private-sector borrowers and interventions in the foreign exchange market. It is worth noting that the SNB had intervened only very rarely in the foreign exchange markets between the early 1980s and 2009. And on the occasions when it had, the SNB’s interventions had typically been small-scale and had been coordinated with the Group of Ten central banks. BIS central bankers’ speeches  1  This changed in March 2009, when, having reduced the short-term interest rate to near zero, the SNB began purchasing foreign exchange in an effort to counter upward pressure on the Swiss franc and prevent an undesirable tightening of monetary conditions. The first escalation in the euro area debt crisis in the spring of 2010 required the SNB to make extensive foreign currency purchases; these were provisionally halted in June 2010 once the economic recovery had gained a foothold. In the first half of 2011, the situation in the euro area took another turn for the worse. Other euro area countries were being dragged into the crisis. The global economic outlook deteriorated and uncertainty on the financial markets was compounded by the US budget dispute. Upward pressure on the Swiss franc was immense at this time. In August 2011, the real export-weighted Swiss franc exchange rate was 40% above its long-term average (cf. chart 2).