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The National Bank – as the guardian of price stability – takes the recent price surge caused by the war in Ukraine seriously. But she doesn’t want to know anything about an interest rate hike for the time being. Instead, it relies on the strength of the Swiss franc as a means of combating inflation.
When a liter of unleaded suddenly costs two francs at the pump – or more; when the heating costs for tenants threaten to go through the roof by the end of the year: this will hit people with low incomes particularly hard. You suffer a noticeable loss of purchasing power as a result of inflation, so you can buy less with your money. They also cannot count on their employer willingly accommodating them with a wage increase. For many companies are struggling with rising costs because they have to pay more for raw materials and preliminary products on the world markets.
Consumers benefit
However, inflation in this country is being dampened by the strong Swiss franc. The exchange rate is approximately 1:1 to the euro. The common currency has not been so cheap for a long time. A year ago, the euro was around 1 franc and 10 centimes. That means: When importing goods from the EU, our most important trading partner, consumers and companies receive a discount – purely due to the exchange rate. Because the Swiss franc has appreciated in value abroad. This will dampen the upward trend in prices in this country. This is one of the reasons why inflation in Switzerland, at a good two percent, is significantly lower than in the euro area, for example. There it was a record six percent, in the USA it even climbed to eight percent.
But the strength of the franc has a catch. It curbs inflation at the expense of growth: at a certain point, for example, travel to Switzerland – and industrial exports from Switzerland to the EU – become so expensive that tourism and the export industry suffer. Economic momentum is lost. Not only inflation will be dampened, but also the economy.
Don’t overstrain francs
That’s why the head of the National Bank, Thomas Jordan, takes every opportunity to confirm that the SNB is active on the foreign exchange market if necessary, so that the franc doesn’t become too strong. The National Bank does not say where the pain threshold is for exchange rates (e.g. parity with the euro). In principle, it does not allow its cards to be looked at when it comes to foreign exchange market interventions. Because that would make it more difficult for them to influence exchange rates, for example by throwing francs on the market and buying euros. In addition, exchanging Swiss francs for foreign currencies, come hell or high water, creates new problems. That inflates the already oversized balance sheet of the National Bank further. And that brings with it new risks.
But that also means that the strength of the franc could gradually become a blunt weapon in the fight against inflation. The National Bank knows that. This is one of the reasons why it takes the latest inflationary tendencies seriously. She can only hope that energy prices don’t rise even more drastically. Otherwise she will soon be under pressure to take action when it comes to interest rates.