, Will rising interest rates cause a currency war?
Central banks face a critical week. To fight inflation, they raise interest rates. The Swiss National Bank has a special asset: the strong franc.
Almost everything is getting more expensive – not just electricity or natural gas, but also coffee, butter or women’s shoes. In Switzerland, inflation reached 3.5%In the euro zone, it was 9.1% and in the United States 8.5% in July. It also increases pressure on central banks to raise interest rates faster. The next big step is expected on Thursday from the European Central Bank (ECB).
Many experts assume that this will immediately raise interest rates by 0.75 percentage points. The Swiss National Bank (SNB), led by President Thomas Jordan, is expected to follow suit on September 22.
Rising inflation now ensures that hard-currency central banks benefit. This reduces the effect of inflation because the prices of imported goods like oil do not rise as much.
In recent years it was generally different, the strong franc was seen as a disadvantage for the export industry – Swiss machines became more expensive abroad. The SNB wanted the currency not to be too strong.
For years, the United States has accused Switzerland, but also China, Japan and eurozone countries, of deliberately letting their currencies devalue in order to gain a competitive advantage. In technical jargon, this is called martial “currency warfare”.
“The SNB lets the franc appreciate against the euro and points to the resulting effects on import prices.”
Mark Brusch, chief economist of the insurer Swiss Life.
This now happens with the opposite sign. “Now the situation has changed; With a strong currency, you can reduce inflationary pressures. We are therefore witnessing a new, inverted form of the “currency war”, says Mark Brusch, chief economist at Swiss Life.
The SNB strengthens the franc to slow inflation. “This allows the franc to appreciate against the euro and accentuates the resulting effects on import prices,” explains Brusch. “The strong franc is therefore a classic adjustment of key rates as well as a monetary policy instrument.” Even for UBS economist Alessandro B, the SNB is likely to be one of the central banks that can strengthen its currency to cushion rising inflation.
Does Switzerland risk being harassed again because of this deliberate appreciation of the franc? So far, no criticism has been heard from abroad. A top banker at a major US bank recently shrugged off the SNB’s revaluation policy: “You have your currency for that.
risk related upgrades
The UBS B economist describes the current development in a less marshal way: “The SNB is currently not taking any action to prevent the currency from appreciating.” In other words, it does not follow a targeted revaluation policy.
And for good reason, because an intentional strengthening of the currency presents dangers. “A central bank that lets its currency appreciate rapidly today runs the risk of foreign trade collapsing in some quarters even during severe economic downturns,” says B.
Because an upgrade does not manifest its effect immediately. “If you look at the economic picture, we are in a state of high inflation and strong labor markets today,” B says. a recession.”
But how much more can Frank grow? According to Brutsch, SNB is currently in a comfortable position. Because the appreciation of the Swiss franc has so far been perceived by the public as advantageous. “At a rate of 0.95 per euro, the call for intervention is likely to be stronger,” says Brusch.
Bee also believes that if the Swiss franc appreciates too much, the SNB will intervene again with intervention in the foreign exchange market or a weakening of interest rate hikes to slow the growth of the Swiss franc.
How well does the Swiss franc protect against inflation? “The strong franc helps to curb inflation, but is certainly not a game-changer when it comes to fighting inflation,” says the UBS expert B. Energy prices and possible second-hand effects turn are decisive for the development of inflation in Switzerland, For example by increasing wages.
This is every central banker’s nightmare scenario: rising prices will cause wages to rise sharply and companies will continue to raise prices accordingly.
“In Switzerland, the share of imported goods and services represents only a quarter of the consumer price index.”
Maxim Boutron, economist at Credit Suisse
Maxim Boutron, economist at Credit Suisse, does not consider the crushing effect of the appreciation of the Swiss franc as particularly important: “In Switzerland, the share of imported goods and services represents only a quarter of the price index at the consumption.” For example, if an increase in the franc of, say, 10% were immediately and completely passed on to consumer prices, this would only reduce the price index by 2.5%.
“In practice, and according to our estimates, the effect of the appreciation of the franc on the inflation rate is weak,” says Boutron. According to CS estimates, the appreciation of the franc against the dollar has virtually no measurable effect on the inflation rate, while a 10% appreciation of the franc against the euro reduces the inflation rate. inflation of 0.5 percentage point.
Jorgos Brazos Since 2015, he has been a business journalist at Tamedia. He mainly reports on the Swiss financial center and the commodities sector. He studied political science at the University of Zurich.More information@jorgosbrouzos