In November 2019 before the pandemic hit Switzerland, Thomas Jordan, the head of Switzerland’s central bank was warning that the bank might need to take interest rates below the unusually low -0.75% rate that prevailed at the time. Since then the rate has risen by 2.5% after a 0.25 percentage point rise announced on 22 June 2023.
The SNB has now hiked rates from a low of -0.75% in June 2022 to 1.75% today, a total rise of 2.50% in 12 months – see SNB chart.
In addition to warning of the perils of making predictions, the abrupt u-turn in the trajectory of interest rates shows how rapidly markets can change in a world where governments can rapidly borrow large sums of money and shower it on their economies. Having central banks on hand to hoover up all the debt they issued in a process known as quantitative easing (QE) was a key ingredient allowing governments to borrow so much at such low rates.
But times have changed. Inflation has returned. This has not only pushed up central bank interest rates but largely taken QE off the table – QE adds fuel to the inflationary fire. With central banks no longer buying government issued debt, governments need to find real buyers for it. This is likely to make borrowing less certain and more expensive.
In 2019, Thomas Jordan was concerned by the strength of the Swiss Franc and talk of more negative rates was aimed at weakening the currency. In 2023, a rising franc is likely viewed as positive, given its potential to shield the country from importing inflation.
However, a rising currency does not protect the country from home grown inflation. If widespread wage increases take hold inflation can be hard to bring down. Higher wages put more money in people’s pockets, which feeds into prices. And continued inflation begets further wage increases.
The UK, for example, appears to already be in this bind. Rising wages, pension and welfare payments are feeding into the UK’s annual inflation of 8.7% (year ended 31 May 2023). And the large gap of 3.7% between the central bank interest rate (5%) and annual inflation is not encouraging.
With a central bank interest rate of 1.75% and inflation of 2.3% (year ended 31 May 2023), Switzerland has a stronger chance of getting ahead of inflation than places like the UK. And Jordan seems to be determined to act tough if required.
The SNB news conference on 22 June 2023 can be viewed here.