The SNB’s spending on foreign currencies increased from 13.2 billion francs in 2019 and reached at its highest since 2012 as it battled renewed upward pressure on the safe-haven franc during the COVID-19 pandemic.
The increased spending inflated the SNB’s balance sheet close to 1 trillion francs - much larger than the size of the Swiss economy.
Despite reducing its interventions in the second half of the year, the size of the balance sheet would not deter the SNB from intervening, the central bank told Reuters.
“The SNB has sufficient scope for expanding its balance sheet further, should this be necessary for monetary policy reasons,” a spokesman said.
“Foreign exchange market interventions and the associated expansion of the balance sheet are currently a necessary monetary policy instrument and have nothing to do with currency manipulation.”
Since January 2015, when the SNB scrapped its policy of pegging the Swiss franc to the euro, its balance sheet expanded from 558 billion francs to 998 billion francs at the end of January 2021.
Nearly 914 billion francs of its holdings are in foreign currency investments.
The SNB, which holds its quarterly policy review on Thursday, said the size of its balance sheet “exclusively reflects monetary policy requirements and monetary policy actions”, with the central bank aiming for price stability.
But some economists are concerned about the potential risks.
“The size of the SNB balance sheet is a massive experiment with an unknown outcome,” said Adriel Jost, an economist at Zurich consultancy WPuls. “If inflation returns, the SNB enters uncharted territory to fight against it. Increasing interest rates would be harder to transmit to the market because of the amount of liquidity in the system,” he said.
The size of the SNB’s balance sheet also risked massive losses if investments in stocks and bonds lost value. This could damage its credibility by pushing it into negative equity, Jost added.
Still, the SNB will be wary about reducing its balance sheet, said UBS economist Alessandro Bee.
“This would be seen by the markets as a hawkish signal, and would lead to the franc’s value increasing, which they want to avoid, he said. $1 = 0.9301 Swiss francs Reporting by John Revill; Editing by Michael Shields and Louise Heavens