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The time of negative interest rates is over

With an unusually clear step, the Swiss National Bank (SNB) is leaving the era of negative interest rates behind. It is just the beginning of a long road to normalization of monetary conditions in Switzerland.

SNB President Thomas Jordan announces an increase in the key interest rate to 0.5 percent.

Arnd Wiegmann / Reuters

It is difficult to recognize anything like normality in these extraordinary times. A small step in this direction is the recent rate hike by the Swiss National Bank (SNB). Because by raising the key interest rate by 0.75 percentage points, the SNB is finally leaving the era of negative interest rates behind. This period, which has punished savers and rewarded debtors since the beginning of 2015, lasted much longer than even the most pessimistic had dared to forecast at the beginning. High time to end this.

Welcome reverse thrust

Nevertheless, we can only begin to speak of normality. It is to be welcomed that the money costs something again. And it is also positive that the side effects associated with negative interest rates – such as the incentive to take excessive financial risks and the associated misallocation of capital – are likely to abate somewhat. But this welcome correction is happening against the unwelcome backdrop of inflation that is far too high, even in Switzerland. This dampens the joy about the monetary policy thrust reversal considerably.

Because although the SNB is moving its monetary policy principle back into positive territory after seven and a half years, savers remain de facto trapped in a negative interest rate regime. With inflation at 3.5 percent and interest on savings close to 0 percent, the purchasing power of savings is dwindling faster than it has been in around 40 years. The loss of purchasing power in bank accounts is currently having a greater impact than it was when interest rates were at their lowest. And until inflation is defeated, little will change in this situation.

It is therefore important to quickly push inflation back into the monetary policy target range of a maximum of 2 percent. The SNB benefits from the fact that the European Central Bank (ECB), in whose area of ​​responsibility inflation has already climbed to over 9 percent, has finally been moving forward for some time. After an inexcusably long period of inaction, the ECB raised interest rates in July and September. Further rate hikes – according to the signals from Frankfurt – will follow. These measures have now also given the SNB additional leeway.

Strong franc as a trump card

With the exceptionally significant interest rate hike, the SNB has used its leeway. And it signals that monetary policy tightening is likely to continue in the coming quarters. In terms of inflation, there is little that is reassuring to report. As SNB President Thomas Jordan explained to the media, the price increases are spreading to more and more goods and services. In addition, companies seem to be able to pass on higher costs to their sales prices with increasing ease. Inflationary pressure increases accordingly.

No one knows how far interest rates will have to rise before inflation can be brought under control. The answer also depends on how exchange rates, the global economic environment and the geopolitical situation develop. Many associated factors – such as energy prices, problems with supply chains or the development of the pandemic – are outside the SNB’s sphere of influence. This contributes to the great uncertainty of the economic environment and severely limits the possibilities of the monetary authorities.

However, the SNB can at least influence the exchange rate. You should also use this option. The fact that the Swiss franc has appreciated by around 7 percent in trade-weighted terms since June has made a significant contribution to dampening inflationary pressure from abroad. Armed with huge foreign exchange reserves, the SNB has plenty of ammunition to further strengthen the franc via foreign exchange sales if necessary. This would also have the welcome side effect of reducing the SNB’s balance sheet again – a contraction that would also contribute to the hoped-for normalization of monetary policy.

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