As we break into summer, a lot is concentrating our minds at GBN.
PRESERVING THE HIGH VALUE OF THE SWISS FRANC
The Swiss National Bank (SNB), in the bid to fulfil the mandate of price stability for a more competitive Swiss economy, continues to favor ultra-monetary policies. Sentiments have grown stronger for further interest rate cuts (i.e. into more negative territory).
The SNB currently charges -0.75 percent on commercial bank holdings up until a given amount. There is a possibility that this rate could be cut further, despite the negative rates. This may occur because of the comparatively higher inflation rates among key international economies and currencies abroad.
The art and science of price stability is achieved by an appropriate blend of interest rates, exchange rates, the supply of money and credit applied in a given economic situation.
How it works:
- Low interest rates promotes the supply of money.
- Low interest rates increases credit to the economy.
- Increase in credit the increases demand for goods, services and investments.
However, there must be good balance to avoid the excesses that might lead to inflation, which could pose a danger to financial and real estate markets.
How it works (II):
- High interest rates leads to reduced money supply and credit, and as such impedes the aggregate demand.
- Once the aggregate demand falls, a lesser amount of available capacity is put to use.
- The drop in capacity utilization then causes a fall in prices.
Switzerland is a highly global economy, thus the exchange rate affects inflation. When imports grow the Swiss franc depreciates, and when production capacity in use increases exports grow and the Swiss franc appreciates.
The Swiss Franc continues to be a safe-haven for investors, therefore its resilience and stability is crucial for global investors especially during times of high volatilities among other global currencies.
With 755 billion Swiss francs in foreign currency holdings, the Swiss national bank continues to weather the impacts of foreign exchange shocks on the national currency to meet its main mandate for a stable Swiss franc.
Swiss National Bank’s Jordan says negative rates remain vital, Reuters