If you can't beat them, join them. As the euro falls, that old adage is set to become relevant to the Swiss and Swedish central banks.
Euro zone economic activity is so weak and inflation so low that investors expect further monetary policy easing. Last weekend, Mario Draghi, president of the European Central Bank, confirmed that he is thinking the same way. Consequently, the euro is falling. This is welcome news for Draghi, since a weaker euro helps exporters and inflates the price of imported goods.
But currencies can only fall against other currencies. Draghi's peers at the Swiss National Bank and Riksbank are in a bind. Like the ECB, they are trying to stave off deflation and would prefer weaker currencies. Unfortunately, the reverse is the case.
More From This Section
Granted, Sweden still has room to cut rates to zero. And the SNB could revert to the old plan of selling currency on the foreign exchanges to enforce the cap. In normal times, either step might count as extraordinary. But even more radical measures may be needed, since the euro looks primed for a period of protracted weakness.
In June, the ECB became the first major central bank to cut a policy rate to below zero. There is no reason why the SNB or the Riksbank can't do the same. They could even go a step further and embark on quantitative easing. While the SNB has a limited pool of Swiss government debt to buy, it could always purchase foreign currency bonds, as academic Jeffrey Frankel suggested for the ECB.
These would be unusual steps. But where big central banks go, smaller ones are sometimes obliged to go further.
