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Overview, Knowing the Swiss Franc, Factors affecting the Swiss economy

Overview of the Swiss Economy

Switzerland is one of the few economies in the world, which is built squarely on its Banking sector. The fact that 50% of the population of Switzerland is employed in the Banking & Insurance industries which contribute 70% to the GDP of Switzerland demonstrates the importance of Banking and dwarfs contributions from other sectors of its economy. Switzerland has had a long history of political neutrality and keeps the information of its foreign investors highly confidential. This has led to the flow of investments into Switzerland during times not favourable for industrial investment from foreign investors who wish to keep their money safe. Hence, the Swiss Franc CHF has come to be known as the 'Safe Haven' currency though it offers very low rate of returns. It holds more than US$2 Trl in offshore assets of about 35% of Global Businesses involved in Private Wealth Management. Though it stands a distant 36th in world rankings of economies, it is one of the richest countries in terms of GDP on a per capita basis due to its low population coupled with a GDP of more than US$260 Bln (2005). Manufacturing & Tourism are the other important economic sectors in Switzerland. It is known for its technological advancements in Precision Instruments, Watch manufacturing, Machinery & Pharmaceutical industries. Europe is the most important trading partner of Switzerland, and its trade balance has been oscillating between small trade surpluses and deficits. It also has a very high Current Account surplus due to the attraction it holds for Foreign Investments.

Regulatory Authority - The Swiss National Bank (SNB)

The SNB is the Central Bank of Switzerland, responsible for framing and implementing the monetary policy. It has complete operational independence and a Committee comprising of the Chairman, Vice Chairman & another member review the monetary policy at least one time in a quarter. The SNB fixes a 'range' of interest rate as its target rather than a specific fixed value and can make changes in its monetary policy at any time. Of late, the SNB has been focusing on the Inflation rate to frame its policies. It seeks to maintain it at less than 2% per year and would intervene by changing the interest rates, if this value is exceeded. Any deflationary tendency would prompt it to loosen the monetary policy. The SNB favours a weak Franc as it believes that a strengthening Franc increasing Inflation, and would intervene in the Forex markets if required. One needs to watch out for two important publications from the SNB - namely the Quarterly Bulletin and the Monthly Bulletin, which describes the existing economic conditions and provides clues to any changes in the monetary policy. The SNB alters the monetary policy in the following ways:
" Changing the Libor Rate: This is the Three-month target Interest Rate and is revised once every quarter. Since the Libor is the most important interest rate for Swiss Franc Investments, the SNB clearly explains why it chose to make any amends to its policy at any given point of time while announcing the changes.
" Repo Transactions: This is like a Secured loan and the SNB implements the changes in the monetary policy by changing the Repo rates. It increases or decreases the Repo rates for lending to the commercial banks & changes the liquidity conditions.

Overview, Knowing the Swiss Franc, Factors affecting the Swiss economy



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