The euro's recent slide against the Swiss currency is raising eyebrows – not only in foreign exchange markets.
COVID, inflation, and negative interest rates: this is the triumvirate driving the Swiss franc's appreciation. The strengthening against the euro in recent days piles the pressure on Switzerland's central bank, which spends much of its time defending the Swiss currency against what it views as too highly valued.
On Thursday, the euro breached 1.05 francs for the first time since July 2015. It quickly recovered from this marker, only to slip further on Friday, where it now trades at 1.0455 francs.
Swiss Haven Entices
The franc's firmament as a haven currency is supported by worries in Europe over rising infection rates in Germany and in Austria, which on Friday reimposed a lockdown. Comparably tame consumer prices in Switzerland factors as well: while inflation rose 4.1 percent in the eurozone in October and 4.5 percent in Germany, it stood at 1.2 percent in the alpine nation.
Will Swiss central bankers intervene more heavily than they already are in foreign exchange markets to stem the franc's rise? They generally have copiously around 1.05 francs to the euro in the past – so frequently that nervous currency dealers around this level are enough to defend it.
Calls For Policy Tightening
The SNB's tools to prevent this are limited: Switzerland won't have the leeway to mop up liquidity until interest rates in the eurozone have reversed into a «normal» monetary policy. The calls for European Central Bank head Christine Lagarde to do precisely this are growing.
Swiss bankers are also increasingly vocally disillusioned about the specter of a temporary phenomenon of rising consumer prices: UBS Chairman Axel Weber on Wednesday cautioned that inflation may remain «uncomfortably high» until 2024, according to «Bloomberg».
ECB's headquarters in Frankfurt (Image: Shutterstock)
One of the most prominent critics of the ECB sits within a stone's throw from the central bank's Frankfurt tower headquarters: Deutsche Bank CEO Christian Sewing has openly called for an end to ultra-relaxed European monetary policy in view of rising inflation. «The ostensible panacea of the last year years – low interest rates and supposedly stable prices – has lost its effectiveness. We're now fighting the wide effects,» he said.
Sewing, in the job for nearly four years, has taken a far more nuanced approach than Lagarde. «Given what I see with currency stability, I'm skeptical because of what I am hearing from clients. They are all prepared for a longer period of inflation and we know what that means: rising expectations of inflation are a harbinger of inflation itself rising – longer term.»
Monetary policy must fight this, sooner rather than later, Sewing urges. «The consequences of ultra-loose monetary policy are always going to be tough to cure the longer that central banks don't count them.»
Throttling Recovery
Those inside the ECB tower view the risks of jeopardizing an economic recovery through rising interest rates as higher than those of inflation. At a time where pricing power has already been lessened by higher energy and petrol costs «tighter monetary policy would only exacerbate the contractionary effect on the economy,» Lagarde said on Friday, according to «Reuters».
The central bank should not tighten policy if inflationary pressure is expected to recede, she argued. «The tightening would not affect the economy until after the shock has already passed.»
