SNB and the Swiss Franc
As announced in Friday’s Chart Book a few weeks ago, I will let my friend and market enthusiast Macro D take the opportunity to opine and write about anything he finds fascinating. Below, you will find his analysis of the SNB and the Swiss Franc.
From Macro D:
It gives me great pleasure, and I'm thrilled to join you all here as a guest writer. I’m truly grateful for the opportunity to contribute to this wonderful community that Paper Alfa has nurtured. It’s a privilege to be able to share my thoughts and ideas with such an engaged and insightful audience.
In my upcoming posts, I look forward to delving into topics that are both educational and enriching, aiming to provide value and insights that can help us all grow.
Thank you for welcoming me into your space, and I can't wait to engage with all of you through these discussions.
Switzerland and the Macro Choices of the SNB
At Bundesplatz 1, 3003 Bern, there is a room in which a person makes decisions that I would dare to define as courageous.
This man in question is Thomas Jordan. He graduated from Harvard and served for many years as an SNB official before taking command of the Swiss Central Bank in 2012. Paper Alfa told me that he met him in 2005 during an investor meeting. Back then, Jordan wasn’t the main man.
On March 21, 2024, Thomas Jordan said:
“The easing of monetary policy was possible because the fight against inflation in the last two and a half years has been effective. For some months, inflation has returned below 2%, falling within the range that the SNB identifies with price stability. “According to our new forecasts, inflation should remain in this range in the coming years, too. With our decision, we take into account the lower inflationary pressure and the real appreciation of the Swiss franc over the last year."
What’s happened?
The Swiss National Bank (SNB) surprisingly lowered its rate from 1.75% to 1.5%. Inflation has not stopped falling in recent months, going from 1.7% in December to 1% in March. This percentage is certainly lower than the 2.4% recorded in March in the Eurozone and the 3.2% in February in the United States. This clear improvement in consumer prices prompted the SNB to act quickly.
In the end, we always end up back there. When a central bank has to deal with a delicate situation, it uses its main weapon (interest rates), and when the central bank is involved in the SNB, this weapon is often used suddenly.
What role does the Swiss National Bank play?
The SNB can influence the value of the Swiss franc in two different ways. First, it tries to ensure that the average inflation rate is lower than that of other countries, but this leads to an appreciation of the Swiss franc in the long run according to the purchasing parity principle.
Secondly, the SNB can influence the value of the franc in the short term with its monetary policy. For example, it can sell foreign currency to make the franc appreciate. This makes imports cheaper, thus keeping Swiss inflation relatively low.
The style of the Swiss Central Bank has always been this:
1) strike the iron while it is hot.
2) don't put off until tomorrow what can be done today because the ideal conditions that present themselves today may not recur tomorrow.
But how did we get to this point?