The Swiss National Bank (SNB) used significantly less money to weaken the Swiss franc last year than it did in 2020. There are good reasons for this. But anyone who wants to communicate these reasons successfully has to fight against illusions.
The SNB only intervened relatively modestly in the foreign exchange market in the third quarter. The main reason for the reluctance is inflation.
The past year not only brought huge profits to the Swiss stock exchange. The Swiss franc has also risen by around 4 percent in nominal terms against the euro. But unlike in the first pandemic year of 2020, when the Swiss National Bank (SNB) intervened against the strengthening of the currency with a record CHF 110 billion, the SNB was comparatively relaxed in 2021. It is true that foreign currency purchases were still made; however, their volume remained far below that of the previous year.
In the third quarter, for example, the SNB took part a relatively modest 2.8 billion francs intervened in the foreign exchange market. Accordingly, foreign currency purchases in the first nine months totaled CHF 8.5 billion. The main reason for the reluctance is inflation. This is much higher in the euro area than in Switzerland. If these price differences are taken into account, the trade-weighted exchange rate has hardly changed since the outbreak of the pandemic. The SNB therefore correctly intervened less.
What is often forgotten when referring to the different levels of inflation is the illusion of money. Many people do not orientate themselves on price-adjusted, but on nominal values; the influence of inflation is thus ignored. Because that is the case, many are likely to wince if the franc continues to strengthen to parity with the euro.
The SNB will then need a great deal of didactic skill to make it clear to the public that such a franc-euro parity cannot be compared with the parity that threatened Swiss exporters in 2015 after the minimum exchange rate was abolished. The inflation differential argument will not convince everyone, as illusions persist.