By raising its key interest rate by 0.75%, the Swiss National Bank (SNB), the only one to have negative interest rates in Europe so far, is moving away from this policy and establishing the main one at 0.5%. Such a decision would have been unimaginable not so long ago.
This is all the more the case as the Swiss franc appreciates strongly, to the point that its value exceeds that of the euro. What was the impact on the Swiss franc and economy?
The highest franc
In the past, the priority of the Swiss National Bank was a Swiss franc that was not too expensive. This should allow the country to avoid being permanently in deflation (a phenomenon that has affected the country several times since the economic and financial crisis of 2008-2009) and preserve the competitiveness of Swiss companies.
The Swiss franc is a haven par excellence. It tends to appreciate when things turn sour on the financial markets (the financial crisis already mentioned and the eurozone sovereign debt crisis or the pandemic). To maintain a still acceptable level of exchange rates, the SNB had even been imposing a minimum level for the Swiss franc at CHF 1.20 for €1, a goal it defended until January 2015.
Today, however, this fight is abandoned. Over one year, the Swiss franc appreciated by 13% against the euro and some 95 cents are enough to buy €1. Over the same period, the US dollar appreciated by 17% against our currency. The Swiss money is, therefore, closely following the greenback, despite interest rates remaining negative.
Strong currency or inflation, you have to choose
Under normal conditions, we would expect to see an SNB that would curb this appreciation of its currency with all its might. If it does not, it is because it has clearly understood that inflation is the main threat to the economy and that this fight must be a priority.
The strong Swiss franc is a significant asset in the fight against price rises because, even if prices soar, this rise is partially offset by the strong franc, which helps soften the impact on Swiss households and businesses. Thanks to it, Swiss inflation in August was only 3.5%, a level higher than the central bank’s targets but lower than the 9.1% recorded in the euro area.
This lower inflation represents a definite advantage for Switzerland, whose leading trading partner is the eurozone. Both consumer price growth and wage pressures are much more significant in the euro area than in Switzerland.
This offers Swiss exporters pricing power allowing them to increase their prices faster than their costs. Thanks to this phenomenon and more significant moderation in wages, Switzerland could gain competitiveness with its competitors.
So here we have a Swiss who is quite comfortable with a strong franc and ends up with low inflation, which is one of her strengths. Swiss households and businesses have understood the stakes. If the central bank had been strongly criticised in 2015, when the floor level for the franc was abandoned, it is primarily supported today.
An eye on the ECB… and the health of the eurozone
We will have understood that since the fight against inflation is the absolute priority, the Swiss National Bank had to raise its key interest rates, abandoning once and for all the negative rates that characterised it since January 2015. The fact that the European Central Bank has increased its own - and will increase its own - makes this decision easier. It allowed the SNB to increase by 0.75%, knowing that the interest rate differential between Switzerland and the euro area would not change significantly, at least not immediately.
So everything is going well in the best of worlds? Not really. Like many other European countries, Switzerland worries about its winter energy supply. With the rise in rates in the Eurozone and the return of tensions in European bond markets, it also fears a return to the problems of the Eurozone’s sovereign debt, which would likely push the Swiss franc towards even higher levels.
Finally, it is concerned about the loss of purchasing power of European consumers – its primary customers – which could affect the performance of many of its companies.
The National Bank of Switzerland, once a champion of negative interest rates, has been quick to feel the wind and adapt. Not only is it one of the few to keep inflation at acceptable levels, but it is also doing so while minimising damage to its economy.
The Zurich Stock Exchange, well diversified and primarily composed of securities not sensitive to economic cycles, such as pharmacy, seems better prepared to face the challenges ahead than many others. We continue to invest in Swiss equities across all of our diversified portfolios. The Swiss bond is more delicate.
With interest rates now in positive territory (and even around 1.3% for the 10-year Swiss government bond rate) and inflation at 3.5%, Switzerland offers accurate rates that are significantly less negative than those in the euro area. But now, primarily overvalued at the moment, the franc risks returning to levels closer to balance.
This development will not necessarily occur in the immediate future, given the very delicate economic situation in the Eurozone. Still, it may happen sooner or later, destroying the interests of an investment in Swiss bonds. That’s why he’s not integrating our portfolios, at least at this point.