STOCK MARKET WATCH -- Monday, 19 January 2015

[Demeter]

19. SNB leaves policy vacuum after shock removal of franc cap

http://in.reuters.com/article/2015/01/16/swiss-snb-strategy-idINKBN0KP2GO20150116

The Swiss National Bank (SNB) had little choice but to abandon its three-year-old cap on the franc but its execution of the move left a vacuum of policy uncertainty where a pillar of stability stood before. With the euro diving against the dollar as the European Central Bank gears up for fresh stimulus as early as next week, the SNB felt the 1.20-francs-per-euro cap was not sustainable and chose to give it up rather than accumulate further risk. Yet in pulling off the move, the SNB - a conservative institution in a safe-haven state - failed to tip off its peers and shocked investors, who were left wondering whether central banks are now less a source of stability and more one of a risk.

"The bottom line: central banks are a lot less predictable than in the past few years," said Christian Gattiker, chief strategist at Swiss bank Julius Baer.

The SNB, whose three board members make their decisions behind closed doors, acted in isolation.

IMF Managing Director Christine Lagarde lamented the lack of a warning from SNB Chairman Thomas Jordan. "I find it a bit surprising that he did not contact me," she said. For ECB policymaker Ewald Nowotny, the move was "a surprising decision".

THE WOMAN IS THE LAST TO KNOW....

In contrast with the ECB, which has 25 policymakers from across the continent who debate major decisions, just three men call the shots at the SNB, albeit in consultation with staff advisers. Details of ECB policy debates often leak because of the large numbers of officials also involved; if President Mario Draghi announces next week that the ECB is to launch quantitative easing, he will surprise no one. Draghi has made no secret of the fact that such a programme is under discussion on the ECB Governing Council. By contrast, as recently as Monday, SNB vice-chairman Jean-Pierre Danthine said the cap, introduced in 2011 at the height of the euro zone crisis to fend off deflation and a recession, would remain the cornerstone of SNB policy. To spring such a U-turn seems at odds with Jordan's own advice. In a 2007 speech, he said: "A transparent monetary policy occasionally does not completely rule out surprises, provided that they occur relatively seldom and are understandable to the public."

While officials at central banks generally play down the idea that they offer each other advance notice, they almost always prepare financial markets, businesses and each other for important policy shifts by openly discussing their thinking in the run up to any move. But Adam Posen, a former Bank of England official who heads the Peterson Institute for Economics in Washington, said transparency at times needed to be sacrificed.

"Central bank communication is overrated," Posen said at an event in Washington when asked about the SNB's move. It's more important to get a policy right than to stick to a "foolish consistency" of communicating everything, he said.

THE MASTER OF SITUATIONAL ETHICS, THAT MR. POSEN....