Swiss Franc's Strength Crucial in Keeping Inflation Low, Says SNB’s Jordan

How the Franc Helped Curb Imported Inflation

Jordan explained that a strong franc is essential for shielding Switzerland from imported inflation. “If you want to protect yourself against imported inflation, then the franc must appreciate,” he stated. This approach led the SNB to halt foreign currency purchases in 2022 and even reduce its foreign currency holdings through 2023, reflecting a strategic shift in managing currency inflows.

Interest Rate Strategy and the Impact of Franc Appreciation

The appreciation of the franc allowed the SNB to implement interest rate hikes more conservatively compared to other major economies. The bank raised its policy rate to 1.75% before beginning a gradual easing in March, while the European Central Bank (ECB) and the US Federal Reserve pushed borrowing costs to much higher levels. This restrained approach was made possible by the franc’s role in stabilizing inflation pressures.

Concerns Over the Franc’s Safe-Haven Appeal

Despite the benefits of a strong currency, concerns persist regarding the franc’s traditional status as a safe haven for investors. Switzerland’s largest manufacturers’ lobby has urged the SNB to consider interventions to prevent further strengthening of the franc, arguing that it could harm the country’s export competitiveness. The franc’s value has recently leveled off after previous surges driven by fears of a US recession and instability in Japan.

Diverging Views on Future Swiss Interest Rates

Market analysts and economists have differing opinions on the future trajectory of Swiss interest rates. While a majority of economists surveyed by Bloomberg expect only one more rate cut of 25 basis points in September, reducing the rate to 1%, traders are speculating on more aggressive easing measures. The evolving balance between inflation management and currency stabilization will likely shape the SNB’s upcoming decisions.

Conclusion

Thomas Jordan’s remarks underscore the pivotal role the Swiss franc plays in Switzerland’s economic strategy. By leveraging a strong currency to combat imported inflation, the SNB has been able to navigate global economic challenges with a measured approach to interest rates. However, as debates continue about the franc’s impact on exports and the future direction of monetary policy, the SNB’s decisions in the coming months will be crucial in maintaining Switzerland’s economic stability.