Zwitserland neemt maatregelen om deflatie tegen te gaan (en)
Switzerland became the latest country to adopt irregular deflation fighting measures on Thursday (12 March) after the Swiss National Bank (SNB) started selling the Swiss franc on international currency markets in a bid to drive down its value.
The results were immediate with the franc dropping dramatically against foreign currencies, reaching 1.54 francs to the euro on Thursday afternoon, its lowest level this year.
On the same day, the SNB also cut interest rates from 0.5 percent to 0.25 percent saying the economy faced its biggest crisis since 1975 and predicting consumer prices would stagnate over the next three years.
The bank justified it dramatic intervention on the currency markets by pointing to the franc's steady appreciation against other currencies in recent months.
"We decided to block a further appreciation of the Swiss franc vis-a-vis the euro. These measures are necessary for our rate cuts to have effect," SNB President Jean-Pierre Roth said in an interview with SF Swiss television.
As interest rates around the world approach zero, central banks have turned to other policy tools at their disposal in a bid to avoid a deflationary spiral, a damaging situation for the economy under which consumers postpone purchases due to anticipated lower prices in the future.
Last Thursday the Bank of England started a process known as quantitative easing, electronically creating more money and embarking on a buying spree of government and corporate debt. It intends to spend £75 billion (€80bn) in this way over the next three months with the possibility to rise to £150 (€160bn) billion after that.
This latest Swiss move is significant however as it opens up the prospect of other countries engaging in similar currency selling operations in a bid to drive down their currencies, with the knock-on effect of increasing export price competitiveness.
It is also the first time a large central bank as actively operated on the currency markets since Japan sought to weaken the yen in 2004.
"Let the currency wars begin," said Chris Turner at ING Financial Markets according to reports in the Financial Times.
However, other analysts poured cold water on the prospects of a currency devaluation battle, despite the fact that Japanese officials have long complained of an overvalued yen.
"Competitive currency devaluation is not likely in Japan now because the risks of sparking trade friction are too great," Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co., told Reuters.
"The Swiss can get away with this because of the relatively small size of their economy and the limited role they play in the global economy," he added.
Japan is the world's second largest exporter after Germany.
The strength of national currencies is a highly sensitive subject for governments around the world who object strongly to third parties meddling in the area.
Recent comments by US treasury secretary, Tim Geithner, saying that he considered China to be a currency ‘manipulator' where therefore seen as highly inflammatory.
Large economies usually avoid currency disputes by agreeing rates in the G7 forum of industrialized countries.
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