3 ways the Swiss National Bank screwed up by Chris Matthews @FortuneMagazine January 16, 2015, 2:53 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons The Swiss National Bank’s decision to remove its currency peg against the Euro on Thursday continues to send shock waves through the market. The decision was a complete surprise, as a bank official reaffirmed its commitment to the policy just two days before the peg was removed. The decision has been costly for currency traders, with at least two big retail foreign exchange brokerages, New Zealand-based Excel Markets and Global Brokers, going bust overnight. It has also sent the value of the Swiss Franc soaring against both the euro and the dollar, as you can see below: The decision is a curious one, as the Swiss Central Bank was coming under no real pressure to remove the peg. Inflation remains remarkably low in the country—last week, the Swiss government announced that prices fell by an annual rate of 0.3% in December, the lowest inflation reading since October 2013. While impending quantitative easing in Europe may force the Swiss Bank to step up its efforts to defend the currency, there is effectively no end to the Bank’s ability to buy foreign currencies to defend the peg, as the Swiss bank can just print more francs. But even stranger was the bank’s decision to make this move just days after an official from the bank affirmed its commitment to the policy. Here are three ways the bank could have done better. 1. Give some forward guidance. Twenty or 30 years ago, it was par for the course for central banks to act in the shadows. Once upon a time, the Federal Reserve, for instance, didn’t even announce interest rate targets. It simply bought and sold bonds, and it was up to analysts to figure out what the bank was up to. But in recent decades, economists have begun to learn the power of communicating with markets and signaling moves beforehand. By giving what central bankers call forward guidance, they can shape the market’s expectations and smooth policy transitions. There’s simply no good rationale for dumping this decision on the markets just days after reassuring participants it would act otherwise. 2. Start small. If the bank was afraid that quantitative easing in Europe would send traders flocking to Swiss assets, it could have just lowered interest rates from -0.25% to -0.75%, as it did, and let the market react to that decision before taking more extreme measures. 3. Do nothing. With inflation and economic growth chronically slow across the world, and forecasts for global growth falling, the rationale for making any moves to tighten monetary policy is thin. What the Swiss National Bank appears to be most concerned about, then, is politics. The Swiss have a long history of adhering to hard money policies and free market principles. Even in extraordinary times, the Swiss bristle against interventions like currency pegs. Furthermore, the Swiss bank is owned in part by private individuals, many of whom are worried about the possibility of the bank losing money on its foreign currency reserves. If the bank did continue to defend its currency peg, it would have had to buy a bunch of Euros, which would presumably drop in value if the European Central Bank began a QE-style bond buying program. The Swiss public was so afraid of this happening that Swiss National Bank President Thomas Jordan was forced to issue a statement back when the peg was instituted explaining why central banks don’t need to keep positive equity on its balance sheet at all times. In other words, the Swiss National Bank’s move was influenced by politics more than economics. The long-term effects on the Swiss economy might not be all that harsh, as Swiss exporters have long dealt with the burden of a strong currency and the Swiss economy is relatively strong compared to its European peers. But the desire to tighten monetary policy in this environment isn’t justified by the facts on the ground, and the decision to head-fake the markets as the Swiss Bank did on Thursday makes very little sense at all.