The Swiss National Bank announced a minimum exchange rate in efforts to weaken the national currency and to protect their economy, as investors around the world searched for secure places during uncertain times.
The Zurich-based bank said it was determined to enforce the rate set at 1.20 francs per euro with “utmost determination,” in an emailed statement on Sept. 15.
Switzerland, a small country located in the center of Europe, experienced large capital inflows as global investors sought a safe haven for their capital amidst the debt problems plaguing Europe.
“Greece is under brink of default,” said Anton Korinek, a University of Maryland economics professor. “A number of other countries like Ireland and Portugal are also in territory of default. Even Italy and Spain are in danger.”
This prompted a rise in the demand for francs, which also increased its price, said Korinek.
“The big problem is [it’s] more expensive to produce goods within Switzerland,” said Martinas Terskin, a University of Maryland finance and accounting major.
Forecasts of a strong currency negatively impacts Swiss exporters and businesses, as more than 50 percent of Swiss products are exported.
This is not the first time that the Swiss have capped its currency. It enforced exchange interventions in the 1970s when the Swiss National Bank announced a temporary exchange rate against the deutsche mark. Switzerland experienced inflation as a result.
Korinek didn’t think inflation is a danger in the case with Switzerland. Inflation might actually be beneficial for the economy. He added that when the SNB prevented currency from becoming stronger, Swiss people were not receiving the benefits of inflation anymore
“The large appreciation of the Swiss franc over the past three years has made import prices [very cheap],” said Korinek.
What may be troublesome is the kind of precedent Switzerland is setting for other countries to observe.
“Then it opens the door for more and more countries intervening in their exchange rates, which is not always a good policy,” said Korinek.
For now, the future for Switzerland does not look very bright.
“What’s going to happen to Swiss people is recession, higher unemployment, and it will just add [Switzerland] to the list of other struggling European countries,” said Terskin