Trying To Wrap Your Head Around The SNB And Denmark?

When the Swiss National Bank lifted its cap on the franc, many thought they understood the message.  It had reached the end of its rope.  Some suggested the ownership structure of the SNB (owned by the Swiss cantons and individuals vs the stock exchange) opposed a further expansion of its balance sheet ~80% of GDP vs ~20-25% in the UK and US by comparison. 

This was an important realization. Out of the Great Depression, national governments discovered their balance sheets. Although Reagan and Thatcher talked about rolling back the welfare state, neither succeeded. The state actually grew under Reagan, and the number of federal government employee rose.  Still the Great Financial Crisis seemed to suggest limitations on the ever increasing state, and this was reflected in the loss of AAA rating by most high income sovereigns.  

In the Great Financial Crisis, central banks discovered their balance sheet.  Is there no limit? From a purely theoretic point of view, there is not one as the central bank can swap reserves for securities endlessly. The Bank of Japan is expanding its balance sheet by 1.4% a month. 

On practical grounds, there seems to be some limit. By buying nearly the entire new supply of Japanese government bonds, the BOJ is disrupting the trading in the largest bond market in the world. It has suggested that if it were to decide to increase its quantitative easing efforts, it would have to buy other instruments, such as regional bonds. 

However, as we argued since the SNB’s surprise announcement, the decision to abandon the franc’s cap does not mean that it has abandoned its strategy, and its balance sheet would likely still expand. The cap was a tactic. It changed tactics. We compare the cap to a Maginot Line. It abandoned this tactic. It was too rigid.  Its intervention became predictable and therefore acted as a transfer of wealth to speculators.

Swiss officials have not suddenly embraced a true free-floating franc. There are numerous signs of SNB intervention, which means  its balance sheet is still expanding. Reports over the weekend claim the SNB has an unofficial target range for the euro of CHF1.05-CHF1.10. What does the unofficial range mean? Does not mean that it is not obligated to intervene to defend it? Does it mean anything but a level that is desired by some officials?