Thomas Jordan, President of the Swiss National Bank (SNB), emphasized that the strength of the Swiss franc has been instrumental in maintaining low inflation rates in Switzerland compared to the United States and the euro area. Speaking to business leaders in Schwyz, Switzerland, Jordan noted that the country’s relatively modest inflation rate—never exceeding 3.5% in recent years—was largely due to the franc’s appreciation.
Jordan pointed out that while inflation in the U.S. peaked at 9.1% in 2022 and reached 10.6% in the eurozone, Switzerland managed to keep price growth significantly lower. “If you want to protect yourself against imported inflation, then the franc must appreciate,” Jordan stated. This strategy led the SNB to halt its foreign currency purchases in 2022 and subsequently reduce its foreign currency holdings through the end of 2023.
This approach allowed the SNB to raise interest rates more conservatively than other major central banks. The SNB raised its policy rate to 1.75% before starting to ease in March, in contrast to more aggressive hikes by the European Central Bank and the U.S. Federal Reserve, which pushed borrowing costs to higher levels. However, the franc’s strength remains a concern for some sectors, particularly exporters. Switzerland’s largest manufacturing lobby has called on the SNB to intervene to prevent further appreciation of the franc, arguing that a stronger currency could hurt the country’s export-driven economy.
Currently, the franc has stabilized after a period of significant gains driven by concerns over a potential U.S. recession and economic uncertainty in Japan. Market analysts and traders are divided on the future trajectory of Swiss interest rates. While most economists surveyed by Bloomberg predict only one more rate cut of 25 basis points in September, which would bring the rate to 1%, traders are anticipating further monetary easing.
Analysis and Market Impact
For investors, the strength of the Swiss franc underscores the SNB’s strategic focus on controlling inflation through currency management. By allowing the franc to appreciate, the SNB has effectively insulated Switzerland from the higher inflation rates seen in other developed economies. This approach has kept the country’s inflation under control, even as global markets grapple with economic volatility.
However, the strong franc poses challenges for Swiss exporters, who may find their products less competitive in international markets. This has led to calls from industry groups for the SNB to intervene and curb the currency’s strength. For investors with exposure to Swiss equities or industries reliant on exports, the currency’s trajectory will be a critical factor to watch.
The potential for further rate cuts by the SNB adds another layer of complexity. If the central bank moves to lower rates further, it could impact the franc’s value and the broader Swiss economy. Investors should closely monitor SNB communications and market signals to assess the implications for their portfolios, particularly in relation to interest rate-sensitive sectors.
