A Swiss currency surprise

The political unrest in France presents the central bank in neighboring Switzerland with a difficult choice. Should interest rates be lowered to slow the rise of the franc? Or should the SNB continue to follow its own course?

Switzerland is seen in the financial world as a safe haven in uncertain times. This is partly due to the predictable, solid policy of the Swiss central bank. For the Swiss National Bank (SNB) itself, the safe appearance has been more of a disadvantage than an advantage in recent weeks. Due to the prospect of parliamentary elections being held in France soon, many parties are choosing to convert euros to francs. The currency has risen almost 5% since the end of May. And the SNB is not looking forward to that. An expensive currency puts pressure on the international competitive position of domestic industry. Manufacturing companies account for a quarter of the Swiss economy and the vast majority of goods are exported abroad.

The Swiss are one step ahead of the ECB
After an increase of almost 20% in the period until the end of 2023, the SNB has explicitly tried to push the franc down over the past six months. The most notable move came on the first day of spring when the policy rate was unexpectedly cut by a quarter of a percent to 1,5%. For a long time it looked as if the European Central Bank (ECB) would be one step ahead of the Swiss. Inflation in the euro zone is slightly higher than in Switzerland, but with a policy interest rate that has been at 4,5% since the autumn, the ECB has already done everything in the interest rate field to ensure that inflation is kept at bay at the latest in the course of the year. will come close to its own target again next year.

Thursday is interest day
This inflation outlook prompted the ECB to lower the policy rate a notch at the beginning of June. But there is a good chance that the SNB will make another countermove tomorrow (June 20). That day, the Swiss central bank will make another interest rate decision. It was recently announced that the government expects economic growth to reach 1,2% this year. The inflation forecast was lowered slightly to 1,4%. Thanks to that low inflation, there is plenty of room to give the economy a boost with a new interest rate cut. The strong rise of the franc even makes that choice a bit easier. The currency market is now pricing in a 73% chance that interest rates will fall. A few days earlier that was only 50%.

Against the flow
Due to the unexpected interest rate cut in March and the recent exchange rate increase due to political unrest, the franc will become one of the bigger currency surprises in the first half of the year. It will also be a major challenge for the SNB to curb new price increases. If interest rates are actually reduced to 1,25%, there will be little room for more interest rate cuts. It will be difficult to counterbalance the ECB, which will further reduce the policy space of 4,25% in the coming quarters. Add to this the fact that the franc is in high demand when political tension rises. All in all, the SNB's attempts to push the franc down feel like swimming against the tide.

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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