As Scotiabank's Guy Haselmann noted in his morning comment today,
"A G-5 central bank just broke its promise to the market... Hidden risks and uncertainties are growing."
As the following note suggests, we have some lessons to learn from yesterday's SNB decision...
Authored by Swaha Pattanaik, originally posted at The NY Times' Dealbook, [11]
Central bankers have to live up to high expectations. Investors and politicians expect them to control inflation, prevent deflation, promote growth and keep the financial system healthy. The Swiss National Bank, an above-average institution, has failed at two simpler tasks, keeping its word and preventing destabilizing currency moves. The lessons for the rest of the world are scary.
After three years, and without either notice or much of an explanation, the Swiss abruptly ditched their cap on the franc’s value. The franc promptly surged 40 percent against the euro before giving back more than half its gains. Investors and Swiss firms were in uproar.
The first lesson is never trust a central banker when he or she makes a commitment or gives guidance.
The Swiss National Bank was considered a reliable institution with a firm grasp on policy. After three years of relying on what it called the cornerstone of monetary policy, it let the edifice tumble. In the messed up world of high debts, slow growth and negative rates, other central bankers can change their mind in equally disruptive ways.
Next, don’t expect miracles in the fight against deflation. Swiss consumer prices are already falling annually, and cheaper oil will weigh on them further. Yet, the Swiss central bank decided that a higher franc, which will increase deflationary pressure, was a lesser evil. European Central Bank chief Mario Draghi wants to do anything and everything to resurrect euro zone inflation. He may not manage.
Finally, don’t believe central banks are omnipotent. Swiss monetary policy did not work as planned. The Bank of Japan, and the European Central Bank, which is expected to launch a government bond-buying program soon, may not be any more successful. The Federal Reserve and the Bank of England do not have to worry much about stimulating growth now, but if they do, their arsenals are depleted.
Politicians have left a lot of the hard work of stimulating growth and inflation to the politically independent central banks. It is high time for elected leaders to take more risks.
