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The Swiss central bank will not realign its monetary policy on Thursday. But calm is deceiving. As the euro has appreciated strongly against the dollar, the ECB has been under pressure. And that would have consequences for Switzerland.
The central bank will communicate its monetary policy decision on Thursday: SNB President Thomas Jordan.
Photo: Urs Jaudas
The timing could not be better for the Swiss National Bank (SNB). Because in the last two weeks all the other major central banks have already communicated their assessments and decisions on monetary policy. The SNB will now be last in line on Thursday. From the decisions of the others it can be deduced that the National Bank will not make any changes in its policy for the moment. However, this does not mean that its board of directors can sit back and relax with Thomas Jordan at the helm – the pressure should even increase. The five reasons for it.
The SNB in tow of the Fed and the ECB
The policy of the Swiss monetary authorities is highly dependent on the actions of the US Fed and the European Central Bank (ECB). This is mainly due to the currency markets. For the SNB, the external value of the franc against these two currency areas is of utmost importance.
For years, his main objective has been to prevent the Swiss currency from appreciating excessively. The more expansively the other central banks supply money to your economy, the greater the risk that the franc will appreciate massively against their currencies, as the Swiss currency will become more attractive in comparison.
In their decisions over the past two weeks, neither the Fed nor the ECB changed key interest rates or increased their cash injections through bond purchases. That explains why the SNB is not required to act, at least on Thursday.
The dollar plays the main role temporarily
For the SNB, the focus is currently not on the currency’s relationship to the euro, but on the relationship to the dollar. The US currency has depreciated significantly since the spring, also against the Swiss franc. The reason: The Fed cut its key interest rate at a one-time pace to just over zero percent while simultaneously launching a historic bond purchase program totaling $ 120 billion per month.
As a result, the dollar has lost much of its relative attractiveness compared to currencies such as the euro or the franc, whose central banks are also pursuing extremely expansionary monetary policy. According to experts, the rise in the price of the Swiss franc against the dollar was the main reason why the National Bank recently continued to intervene in currency markets to weaken the Swiss franc. By contrast, the exchange rate between the Swiss franc and the euro remained relatively stable and is far from its May lows.
Interest rates will remain extremely low for years.
Finally, a radical innovation in the future policy of the Fed is of great importance for the interest rate outlook. Instead of hitting an inflation target with pinpoint precision, the US Federal Reserve now wants to tolerate short-term deviations and only achieve the target inflation rate over a multi-year average. Specifically, this means that the US Federal Reserve will leave its key interest rate at the current low of just over zero percent for at least three years.
Therefore, the Swiss National Bank has no choice but to follow these guidelines if it does not want to risk another dangerous appreciation of the Swiss currency against the dollar. If interest rates were to rise, there would actually be a threat of appreciation not only against the dollar, but also against the euro. The next point explains why.
The ECB’s suffering from the expensive euro
The devaluation of the dollar is putting pressure on the euro zone. On the one hand, because it was more affected by the crisis of the Crown, on the other hand because many member countries, especially Germany, rely heavily on export surpluses. The rise in the price of the euro against the dollar therefore worsens the economic situation of these countries at the worst possible time.
Therefore, the ECB is concerned about the expensive euro. However, his mandate prohibits him from basing his monetary policy on the exchange rate. At Christine Lagarde’s press conference on September 10, for example, the strange situation arose in which the head of the ECB emphasized this restriction several times, but also repeatedly pointed out the problem of the high external value of the euro. These caveats were even in the previously written introductory comments, and that’s unique. Lagarde even informed the media.
Therefore, the ECB will do nothing to give the euro a new boost, but will do anything to weaken it again, even if the ECB would never justify it in that way. A further appreciation of the Swiss franc against the common currency remains a risk.
Americans on the neck
The SNB’s main instrument to prevent an appreciation of the Swiss franc will continue to be purchases of foreign exchange. But here too the team around Thomas Jordan is under pressure, not just because of the increasingly inflated balance sheet of the central bank. The United States government is on his neck with suspicion of being an unfair currency manipulator. That is why the SNB is under observation by the Americans. If the Americans conclude that the SNB is now intervening in the currency market to weaken the franc against the dollar, things could get awkward.
