Central banks are pretty challenged in their quest to fight inflation while maintaining economic growth. In Switzerland, the overall scenario may be still largely positive, but the imponderables are quite significant, as Andreas Britt writes in his article for finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
The Swiss National Bank has a knack for making very little noise and keeping a low profile. Linking the franc to the euro and the later lifting of it together with the introduction of the negative interest rate were rare exceptions.
Discretion is entirely in the interest of our monetary watchdogs because after all, no news is always good news. «Non Event» is, therefore, a good description of the quarterly monetary policy statements by Thomas Jordan and his two colleagues on the governing board of the SNB, Fritz Zurbrügg and Andréa Maechler.
«Non Event» because at first glance one very often gets the impression that the trio is quietly enjoying presenting the inclined media representatives with an identical text as the previous time. Only on the second view will the careful reader see a slightly adapted formulation.
«It appears to be pure wishful thinking that workers will voluntarily forego increases to match inflation»
The announcement published on Thursday (yesterday) occurred for once under completely different circumstances: The parameters have changed in several ways, partly before, but mainly because of the horrific Russian invasion of Ukraine.
Inflation figures are overshooting worldwide, to a large extent for reasons that already existed before the war, but have now been fueled by rapidly rising energy prices – as a direct consequence of the Putin aggression. The U.S. now stands at nearly 8 percent annual inflation, the European Union at 6 percent, both far from the price stability defined as the main goal of monetary policy.
Added to this are the disrupted supply chains, originally a consequence of the pandemic, which, as is well known, is not over and in China, for example, is still causing disruption, some of them massive. Depending on the course of the crisis triggered by Moscow, energy prices are likely to shoot up even further, and probably also cause further second-round effects. It appears to be pure wishful thinking that workers in the major economies will voluntarily forego increases to match inflation.
«The Swiss franc is once again living up to its reputation as a currency of safe haven»
Because of the war and of rising prices, global growth is in danger of being hurt significantly. Although the Russian economy is much smaller than one might expect for such a vast country, as the renowned economist Stefan Gerlach pointed out to finews.com this week, a further escalation of hostilities – i.e. NATO involvement – would also constitute a problem for the global economy. A risk that is also well known to central banks.
High inflation figures and question marks surrounding global growth are the fields of tension in which central bankers currently have to formulate their interest rate policy. A little too fast and a little too much, and growth threatens to dry up; but too much hesitation does not seem advisable either, given the massive price spiral.
In Switzerland, the situation is compounded by the Swiss franc, which is once again living up to its reputation as a currency of safe haven. Shortly after the outbreak of war it reached parity with the euro and is currently trading around 10 percent higher than it was at the beginning of 2022. In previous years, exporters would have long taken to the barricades over this. Not so this year. So it made perfect sense for the SNB to use the inflation differential with the euro area and the U.S. as a justification for a controlled, moderate appreciation and thus take pressure off the system. Those who can achieve higher prices for their products abroad are also able to withstand a stronger franc, was Jordan's argument.
«There is certain helplessness in the words of the monetary watchdogs»
The three key points presented by the SNB's top officials on Thursday actually read quite well: Inflation around 2 percent this year and just under 1 percent in the two following years. Growth will be curbed briefly to 2.5 percent this year, before picking up again, with all the positive consequences for the labor market and companies. And in addition, a slight appreciation of the Swiss franc is tolerated by the SNB.
If only there weren't the many question marks, the risks and sore points. What if the war escalates, what if the crisis in the major economic zones causes major upheavals, what if the franc soars again, what if the stock market plummets more drastically than it did a month ago?
The monetary guardians try to provide the Swiss economy and the population with the optimal conditions for growth and prosperity. In a small and open economy, however, the central bank is very dependent on events abroad, and this is what is evident once again today. There is certain helplessness in the words of the monetary watchdogs when they say that there is great uncertainty, that the course of war is difficult to assess and that there are significant risks to growth. Will there really be an interest rate hike early next year, as many economists are predicting? That does not really seem to be in our hands.
«Nevertheless, the question arises as to how the bank would explain a mega loss»
What we could do as Switzerland, however, would be to take a decisive step and address the issue of the balance sheet. The SNB, as we know, manages a trillion in foreign currency assets that it has accumulated in its fight against a stronger franc. Somehow, no one seriously believes that there will be a turnaround soon. SNB President Jordan never tires of emphasizing that the bank needs the money in order to retain a free hand in monetary policy, and defends himself against any interference. That is his right. The argument that policymakers should not interfere with the central bank's independence without good reason is, of course, legitimate and absolutely central to the bank's credibility.
Nevertheless, the question arises as to how the bank would explain a mega loss to the interested public should there be a major crash on the markets. Wouldn't this damage credibility much more?
There is no need to paint the black on the wall – reality is doing that right now without our doing. Perhaps the time would have come for politicians to address the issue of the SNB balance sheet, in the spirit of an SNB that should perhaps relinquish some responsibility?
Andreas Britt is an author and senior contributor to finews.ch and finews.com. He studied political science at the London School of Economics. After completing his studies, he worked as a reporter and editor at «Bloomberg News» in Zurich and Stockholm and specialized in political and macroeconomic topics. Subsequently, he worked for eight years at the Swiss federal administration as a political scientist and manager. In 2015 he joined finews.com and left in 2021. Since then, he works freelance as an author and finews.ch/finews.com collaborator.
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