Opinions Joost Derks
Frank and free? That's not right
As a safe haven, the Swiss franc has long had the wind at its back from a growing turmoil in the financial world. There is now an interest benefit on top of that. But why isn't the currency soaring much faster?
Switzerland has many things that you as a Dutch person can look at with envy. Beautiful mountains, delicious chocolate and until a few years ago even an almost holy bank secret. Although the latter is now a thing of the past, modest inflation and a decisive central bank can be added to that list. While inflation in the Netherlands is almost 10%, that percentage in the Alpine country is below 3%. Those reasons were already a good topic for early April a column† For those who don't feel like looking for them again, this is the list in short: thanks to nuclear power plants and hydropower, the country is not bothered by higher energy prices, forced reductions in health insurance premiums and an expensive franc.
Unexpected timing, surprising size
That franc also received a strong boost from the Swiss central bank a week ago. As a surprise move, the Swiss National Bank (SNB) raised its key rate for the first time in XNUMX years. Not only was the timing of the adjustment unexpected, but so was its magnitude. While the European Central Bank (ECB) seems very cautiously anticipating an increase of a quarter of a percent, the interest rate in Switzerland has risen by no less than half a percent. The SNB even hinted at further rate hikes in the coming months. That is quite a change of course. Until recently, Switzerland's central bank, along with Japan's, was the only one in the world that had not expressed a desire to raise interest rates.
Nice shelter with the franc
Rising interest rates usually make it more attractive to hold assets in a particular currency. Although few parties are insistent on this at the current rate of -0,25%, it does lower the threshold for those who want to switch to the Swiss franc due to uncertainty about the financial climate. The currency is considered a safe haven thanks to a strong banking sector, a domestic economy that is not easily disrupted by external factors and a cautious central bank. Those traits are a major reason why the franc has risen nearly 10% against the euro since September last year. Although in theory the franc continues to hold the tail, in practice it looks different.
Border of granite or paper?
As soon as the limit of €1 threatens to be broken, the SNB hits the brakes hard. In this regard, the central bank strives for predictability and wants to prevent the international competitiveness of the Swiss business community from being eroded. Last year, interventions in the foreign exchange market cost the SNB 21,1 billion francs. And in corona year 2020 that was even 110 billion francs. Is there a limit to what the bank can do to defend the €1 limit? Undoubtedly, because in January 2015, the limit of €1,20 was unexpectedly released. At the time, the franc shot up by more than 15% in one fell swoop. However, the surprising interest rate hike underlines that the SNB is not looking into the cards. So for the time being, it makes little sense to bet on a higher franc.
Joost Derks
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