Our Core Thesis: European leaders have successfully implemented austerity, disallowed notorious wage increases in the periphery and nearly introduced deflation. Inflation differences between the euro zone and Switzerland will decrease to zero, Swiss inflation might even be higher in some years. With time, the remaining slight CHF overvaluation will shrink to zero but the EUR/CHF will remain close to 1.20. Risk-off flows will not leave Switzerland, but they will be converted into risk-on flows (stocks and real estate) thanks to high immigration and higher Swiss GDP growth. In some years strong global growth and high German wage increases will boost inflation in Germany and Switzerland but Southern Europe will still struggle. At that moment the SNB will need to hike interest rates - before or in line with the ECB and the EUR/CHF will fall under 1.20.
The consequence for monetary policy will be:
Either the SNB fights inflation and the Swiss real estate bubble, allows a CHF appreciation and sells reserves below the price of EUR/CHF 1.20 or
Switzerland accepts higher inflation and consequently gives up its competitive advantage in lower inflation and lower borrowing rates. The latter scenario was excluded by the SNB's Thomas Jordan already in 1999 when he pledged against a euro membership. The SNB mandate explicitly disallows inflation.
The first scenario, namely that the SNB sells reserves below EUR/CHF 1.20 is therefore the only feasible solution. Whether the SNB suffers a big loss depends on the income it can generate in the meantime. In regular posts we show how the Swiss CPI comes closer and closer to euro zone inflation. One day, maybe in 10 or 20 years, the Swiss franc will depreciate more strongly, but this will be only after the bust of the Swiss real estate bubble.
The SNB currently owns 56% of the Swiss net international investment position (“NIIP”). In the year 2007 this number was only 12%. Is the central bank implicitly nationalizing the Swiss international companies?
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