Huge loss at the National Bank
The Swiss central bank writes a minus of almost 33 billion francs for the first three months.
Specifically, the SNB reported a loss of CHF 32.8 billion for the period from January to March 2022, as announced on Thursday. While there was a minus of 36.8 billion on the foreign currency positions, there was a valuation gain of 4.2 billion on the gold holdings, which were unchanged in terms of quantity.
The profit on the Swiss franc positions was only 10.6 million francs. The negative interest charged on current account balances was offset in particular by price losses on interest-bearing securities and instruments.
Dependent on the financial markets
As usual, the SNB emphasized that its results depend primarily on the development of the gold, foreign exchange and capital markets. Strong fluctuations are therefore the rule and conclusions from the interim result to the annual result are only possible to a limited extent.
It is often primarily the strong Swiss franc that affects the results of the SNB. In the quarter under review, however, rising interest rates and the weak development of the stock markets were the main reasons for the losses on the foreign currency positions.
Gold has gained
It is a well-known fact that bonds lose value when interest rates rise. These losses accounted for 25.1 billion Swiss francs. In addition, there were price losses of 10.7 billion on shares and similar papers, which also suffered from rising interest rates, but also from the Ukraine war.
In addition, there were exchange rate-related losses totaling CHF 3.4 billion, as the Swiss franc tended to strengthen slightly. After all, the SNB still received interest and dividend income totaling CHF 2.4 billion on its foreign exchange reserves of over CHF 900 billion.
The gain in gold holdings results from the rise in the price per kilo (in Swiss francs) by a good 7 percent to 57,550 Swiss francs in the first quarter. Above all, the sharp increase in inflation and the Ukraine war have given the precious metal a boost.
Central banks in a dilemma with a view to high inflation
Central banks around the world are currently under a lot of pressure. With a view to inflation, they have to turn interest rates around. At the same time, raising interest rates too much threatens to stall the economy. Central banks have long held onto the belief that the rise in prices as a result of the pandemic, high energy prices and faltering supply chains is only “temporary”. But it is now clear: you must act.
Keeping inflation in check is the traditional task of central banks. The Federal Reserve (Fed) in the USA, the European Central Bank (ECB) and the Swiss National Bank (SNB) primarily use the key interest rate instrument for this purpose. The simplified idea: If you lower interest rates, more individuals and companies can afford a loan, which leads to higher spending, a growing economy and rising inflation.
Theoretically, it works the other way around when interest rates rise: citizens and the economy borrow less money or have to spend more on loans, growth slows down, companies can no longer simply pass on higher prices and inflation falls.
“We will take the necessary steps to guarantee a return to price stability,” US Federal Reserve Chairman Jerome Powell promised at the end of March. “The job market is very strong and inflation is way too high,” he added. Countermeasures are easier for the Fed than for the ECB because the US economy is growing rapidly. The unemployment rate recently fell to a low 3.6 percent, and many companies are already complaining about a shortage of workers.
When will the ECB follow?
But there are also signs of an end to the ultra-loose monetary policy in Europe. In Washington, Nagel held out the prospect that the ECB could raise interest rates as early as July – earlier than previously thought. Nagel did not want to predict how many interest rate hikes are to be expected this year. Financial markets are expecting the ECB to raise the deposit rate, at which banks can park money with it, to zero this year. It is currently at minus 0.5 percent.
The most effective weapon in the central banks’ arsenal, the key interest rate, can only influence the causes of the current price increases to a limited extent. The disruptions in global supply chains, the far-reaching corona lockdowns in China, the war in Ukraine and rising energy prices do not react directly to the key interest rate. The central bankers’ best hope is that their decisions will help the inflation rate slowly come down again.
SNB less under pressure
Interest rates could also rise again in Switzerland in the foreseeable future. Experts agree that the door opener for this would be a prior interest rate hike in the euro zone. If the SNB were to rush ahead with interest rate hikes, it would risk a strong appreciation of the franc.
After all, inflation in this country is limited compared to the USA or Europe. The strong currency and the far-reaching independence in energy supply dampened the inflationary pressure somewhat, say economists. However, a negative SNB deposit rate of -0.75 percent no longer fits in with the current inflation rate of 2.4 percent.
Published today at 07:35
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