Financial markets are being battered globally and concerns about inflation and geopolitical risks might face further pressure after the Swiss National Bank (SNB) surprisingly altered its policy course last week.

In an interview in May with the magazine «Bilanz,» SNB President Thomas Jordan hinted that the bank would change policy. «We are moving into an unpleasant situation for monetary policy. Inflation is already high globally and is even rising in many countries, At the same time, economic activity is weakening worldwide,» he told the magazine. He added that «we will, of course, analyze and take into account the impact of the sharp rise in global inflation on Switzerland.

Even so, the 50 basis point increase in its benchmark rate was headline-grabbing, but perhaps the more important bit of news was the omission of two words from its most recent statement on monetary policy. For years the SNB consistently said the Swiss franc was «highly valued.» Those two words were dropped from its June 16 policy statement, signaling the bank will no longer weaken the franc by purchasing foreign currency. To be sure, the bank isn't taking its eye completely off forex activities and to «ensure appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary.» 

Recycling Proceeds

The SNB is rather unique in its approach to utilizing the proceeds of its intervention in the currency markets, building its reserves to nearly 1 trillion US dollars. It channels those proceeds into the global financial markets rather than holding them at home, «Reuters» explains in an analysis. That makes the central bank a very big player in the global bond and equity markets. In fact, in recent years, it was one of the largest owners of Apple, Amazon, and Microsoft shares, according to the analysis.

But by unwinding these positions the SNB has risks increasing volatility in markets that are already incredibly jittery from recent developments.

One way to monitor what the SNB is up to in the currency markets is by looking at its total sight deposits at Swiss banks which acts as a proxy indicator for intervention. In the week ending June 17, these declined by 1.3 billion Swiss francs compared with an increase of 756 million a month ago and an almost 6 billion increase in April, the analysis showed. 

The analysis goes on to observe that the current policy shift is far from the SNB's decision in 2015 to unhitch the franc from its peg to the euro. Even so, tighter policy and a potential step back from its market involvement come at a time when the global financial markets are facing substantial downward pressure, according to «Reuters.»