Switzerland's currency secret

Central bankers in many countries meet in mid-December to make an interest rate decision. Low interest rates are likely to rise less quickly in Switzerland than in Europe or the US, for example. With the strong franc, the country already has a good inflation weapon.

Central banks all over the world are working hard to bring high inflation under control. In this respect, the Swiss central bank (SNB) is increasingly becoming the odd one out. While policy rates are shooting up in many countries, the SNB has recently taken a cautious stance. In June, the bank acted reasonably early with an interest rate increase of 0,5%. And in September even an increase of 0,75 percentage points followed. But the current rate of 0,5% is well below the 2% in the eurozone and the 4% in the United States.

The idiosyncratic course of SNB
Meetings of central banks in Europe, the United States, Switzerland and Great Britain are scheduled for mid-December. There is a good chance that the Swiss interest rate increase will then be smaller than that of, for example, the European Central Bank or the Federal Reserve. The key to the SNB's deviating policy must be sought in the foreign exchange market. There, the Swiss franc has risen by 5% against the euro since the beginning of June. Compared to the spring of 2021, that profit even exceeds 12%. A more expensive currency automatically puts a brake on inflation. All foreign products and services become cheaper due to the translation into their own, expensive currency.

Currency as an inflation inhibitor
In Europe, we experienced the opposite effect for a large part of the year. Due to the rise in the price of the dollar, the costs of all kinds of import goods that are traded in the US currency also increased. This further fueled the fire of inflation. But while inflation in the Netherlands stood at over 11% earlier this week, Swiss inflation is below 3%. Fair is fair: that low inflation is not entirely due to the strength of the franc. Switzerland depends on hydropower and nuclear power plants for more than 90% of its energy supply. As a result, the country is relatively unaffected by the sharp rise in natural gas prices.

Step back
Lately, however, the Swiss franc has taken a step back. With this, the currency world seems to be preparing for interest rates in the country to rise less quickly than in the eurozone. It remains to be seen whether the SNB will allow the inflation weapon to be stolen so easily. In the past, the bank regularly intervened in foreign exchange markets to prevent the franc from becoming so expensive that the competitive position of the Swiss business community deteriorated sharply. Recently, the SNB has been increasingly inclined to give the currency a boost. On the other hand, an important tailwind behind the franc seems to be disappearing. The Swiss currency is a safe haven in uncertain times. Recently, the air on the financial markets seems to have cleared somewhat. If that movement continues, it will be very difficult for the SNB to keep the franc afloat.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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