Swiss National Bank (SNB) Chairman Thomas Jordan commented on Friday that further tightening of monetary policy should not be excluded. Inflation remains a concern in Switzerland, according to Jordan’s statement.
In recent years, central banks worldwide have adopted a zero or negative interest rate policy (ZIRP or NIRP) to combat financial instability and encourage consumer spending to boost the economy. The Swiss National Bank is no exception, as it has maintained negative interest rates since January 2015. Despite these efforts, the Swiss economy still faces the challenge of inflation, which is now causing SNB Chairman Thomas Jordan to consider further tightening monetary policy.
Switzerland has struggled with an inflation problem since the 1970s. Low inflation rates, particularly deflation, can lead to stagnation in the economy. This is because consumers postpone spending and businesses delay investment, expecting prices to fall further. These tendencies can lead to reduced consumer demand, which in turn causes businesses to cut prices to increase sales, further depressing the domestic economy.
The onset of the Covid-19 pandemic led to a series of global economic slowdowns, with Switzerland facing its worst economic slump since the 1970s. While some recovery did occur in the latter half of 2020, it remains unclear what the future holds for the Swiss economy due to uncertainties surrounding the pandemic and its long-term impact on both domestic and international markets.
SNB’s Thomas Jordan has referred to inflation as the “key risk” for the Swiss economy. One reason is the pressure on the Swiss Franc, which has traditionally been regarded as a safe haven currency in times of crisis. Folks consider the Swiss Franc to be a stable currency as it does not experience significant fluctuations in value. Consequently, international investors are drawn to it, and this high demand results in upward pressure on the price of the Swiss Franc.
This appreciation of the Swiss Franc can create problems for Switzerland’s economy. The rise in the value of the currency makes Swiss exports uncompetitive, as they will be more expensive for overseas consumers. This may result in a sharp drop in demand for Swiss goods and services, worsening the country’s trade balance, and increasing unemployment as companies reduce production and cut costs.
To counter the negative effects of an appreciating currency, the SNB has been intervening in foreign exchange markets, selling Swiss Francs to purchase other currencies for years. Such interventions aim to weaken the Swiss Franc, thereby making Swiss exports more attractive and competitive.
In addition to the Swiss Franc, low interest rates have also become an issue in Switzerland’s struggle with inflation. Negative interest rates, as mentioned earlier, seek to stimulate borrowing and lending, which contributes to increased spending and investment. However, prolonged periods of low interest rates can also cause the problem of “zombie companies,” which are firms that only survive due to the low borrowing costs this policy provides. These companies contribute little to overall economic productivity and growth, and their existence distorts market dynamics and prevents competition.
Despite these issues, Thomas Jordan emphasized that the SNB’s monetary policy must remain restrictive. Any future tightening would be contingent upon the bank’s assessment of the Swiss economy’s inflation risk and the impact of ongoing factors such as the pandemic on both domestic and global markets.
While the Swiss National Bank faces the challenge of addressing inflation concerns and a strengthening currency, it must be cautious in enacting policy changes. A premature or aggressive move to tighten monetary policy may have unintended consequences and further destabilize the Swiss economy.
For instance, if the central bank unexpectedly raises interest rates, businesses and households may find it more difficult to access credit, leading to reduced borrowing and spending. This could slow down economic growth and potentially precipitate a financial crisis if debts become unmanageable for both companies and individuals.
Additionally, a sudden tightening of monetary policy could lead to a sharp depreciation in the Swiss Franc, which may negatively impact international investor confidence in the currency. This uncertainty could eventually lead to a reduction in foreign investment in Switzerland and further stimulate inflationary pressures.
Ultimately, the Swiss National Bank must navigate a complex economic landscape as it seeks to address inflation and manage monetary policy. While it is clear that policymakers are aware of these challenges, they will need to act prudently and carefully to ensure that they can simultaneously protect Switzerland’s economy and maintain its international reputation for stability and financial soundness.
In conclusion, the recent statement by SNB Chairman Thomas Jordan about the possibility of further tightening monetary policy signifies an acknowledgment of Switzerland’s ongoing inflation concerns. It is crucial for the central bank to strike the right balance between supporting economic growth and combating inflation while considering the potential risks and consequences associated with its policy decisions.
