The political unrest in France poses a difficult choice for the central bank in neighboring Switzerland. Should the interest rate be lowered to slow down the rise of the franc? Or should the SNB continue to chart its own course?
Switzerland is seen as a safe haven in uncertain times in the financial world. This is partly thanks to the predictable, solid policy of the Swiss central bank. For the Swiss National Bank (SNB) itself, the safe image has been more of a disadvantage than an advantage in recent weeks. With the prospect of parliamentary elections in France soon, many parties are choosing to convert euros into francs. The currency has risen by almost 5% since the end of May. And the SNB is not looking forward to that. A strong currency puts pressure on the international competitiveness of the domestic industry. Manufacturing companies account for a quarter of the Swiss economy and the vast majority of goods are exported abroad.
Swiss ahead of the ECB
After a nearly 20% increase in the period until the end of 2023, the SNB has been actively trying to push the franc down over the past six months. The most remarkable move came on the first day of spring when the policy rate was unexpectedly lowered by a quarter percent to 1.5%. It seemed for a long time that the European Central Bank (ECB) would be ahead of the Swiss. Although inflation in the eurozone is slightly higher than in Switzerland, with a policy rate that has been at 4.5% since last fall, the ECB has already done everything it can on the interest rate front to ensure that inflation returns to its target by next year.
Thursday is rate day
The inflation outlook was the reason for the ECB to lower the policy rate in early June. But it is likely that the SNB will make a countermove tomorrow (June 20). That day, the Swiss central bank will make a rate decision. It was recently announced that the government expects economic growth to reach 1.2% this year. The inflation forecast was slightly lowered to 1.4%. Thanks to this low inflation, there is plenty of room to give the economy a boost with a new rate cut. The strong rise of the franc makes this choice even a bit easier. The currency market now prices in a 73% chance of a rate cut. Just a few days earlier, it was only 50%.
Against the tide
With the unexpected rate cut in March and the recent price increase due to political unrest, the franc is becoming one of the bigger currency surprises in the first half of the year. It will also be a significant challenge for the SNB to contain further price increases. If the rate is actually reduced to 1.25%, there will be little room left for more rate cuts. It will be difficult to counterbalance the ECB, which will further reduce its policy space of 4.25% in the coming quarters. Add to that the fact that the franc is in high demand when political tensions rise. All in all, the SNB's attempts to push the franc down feel like swimming against the tide.
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