SNB impact will be felt for some time
The aftermath of the Swiss National Bank’s (SNB) decision to end the coupling of its Swiss franc to the euro is still rippling out through global markets. The losses are still being tallied, but perhaps worse than that, it will have given critics of central banks a greater supply of barbs to use.
After the announcement was made, the Swiss franc soared over 40 per cent versus the euro, climbing way past parity and causing traders to scramble to reposition themselves and minimise losses. However, for some, it was too late.
There's no doubt that the actions of the SNB have resulted in huge losses from large banks, brokers, hedge funds, mutual funds and currency speculators. The losses are still being counted and, when totted up, are expected to be in the billions of dollars.
Scrutiny will be once again placed upon the role central banks have in the world economy, critical examination that perhaps began after the European Central Bank lowered rates for the benefit of their domestic EU exporters at the cost of non-European exporters. With the new SNB action sending some firms to the brink of insolvency, and has already pushed a couple over the edge, critics will be seriously questioning whether central bankers are doing more harm than good.
When such a tiny country as Switzerland can rock the very foundations of the financial world, it really highlights how closely linked everything is in this global economy. Nothing is independent anymore and future announcements of central banks will be garner the close attention of investors, potentially leading to even more volatility in the run up to, and following, these decisions.
We can also expect the number of these decisions to rise, as the challenges central banks face continue to stack up. For instance, the deflationary fears and pressures in the EU are widely expected to see the ECB begin quantitative easing this week. It seems like a cycle that central banks have tried to combat before, implying that the measures central banks took in the past have been ineffective.
However we look at it, central banks are probably here to stay. But a growing concern is that international trade and relations may become strained, as we see an increase of nationally-focused moves that look to improve the conditions countries are under.