The Swiss National Bank (SNB) introduced a minimum exchange rate, pegging the Swiss franc (CHF) at 1.20 per euro in 2011. However, on 15 January 2015, the SNB unexpectedly announced it would discontinue the minimum exchange rate policy. Given the figure showing the CHF/EUR rate:Which of the following statements is NOT correct?

Question

BlackTom AI · Accepted Answer

Non-sterilized foreign exchange intervention increases the domestic monetary base because the central bank pays domestic currency to buy foreign currency, which in isolation is inflationary. Key concepts: (1) A pegged floor requires central-bank purchases of foreign currency to defend the peg; (2) sterilized vs non-sterilized intervention — sterilization offsets the money‑supply effect by selling domestic assets or using other instruments; (3) an unpegging causes an immediate market revaluation; (4) Purchasing Power Parity (PPP) / real exchange rate can diverge from nominal spot rates.

Step-by-step reasoning from the figure and theory:
1. The peg at EUR/CHF = 1.20 was defended 2011–2015. To prevent CHF strengthening (CHF/EUR decreasing), the SNB would buy euros and supply CHF — this supports choice (b) as correct.
2. On 15 Jan 2015 the SNB removed the floor and the blue spot line shows a sharp drop in EUR/CHF (the euro lost value versus the franc). Because EUR/CHF fell, the franc appreciated (a stronger CHF), so (a) is correct.
3. The red dots (real/PPP-adjusted rate) move relative to the spot series after the announcement: the real rate and spot diverge around the event, so (c) is correct.
4. Statement (d) claims: “If the interventions were done as a non-sterilized intervention during 2011–2015, the Swiss government may have a long-term inflation threat.” This is misleading and therefore NOT correct in this context. While non-sterilized purchases do initially expand the monetary base and can be inflationary in principle, the SNB is an independent central bank and could sterilize later or use policy tools (reserve management, negative rates, issuance of domestic liabilities) to offset money-supply increases. Empirically Switzerland experienced low inflation during and after the peg period, which indicates that a guaranteed long-term inflation threat to the Swiss government did not materialize simply because the SNB accumulated foreign reserves. Thus the conditional claim in (d) is too strong/misplaced and is the false statement.

Therefore the correct NOT-correct choice is (d), matching the provided answer.

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