The Swiss National Bank celebrated its 115th birthday this year. Based in Zurich and Berne, this institution has been shaping Switzerland’s economic policy since 1907. Its overriding goal is clearly defined: the SNB is to ensure price stability, while taking due account of economic developments. At present the mix of rising inflation and the macroeconomic risks resulting from the war in Ukraine is presenting the SNB with a particularly great challenge. Although the upward pressure on prices is more moderate in Switzerland than in other countries and regions, in March the National Bank nevertheless adjusted its inflation forecast significantly higher in March. It now anticipates a rate of 2.1% for 2022, compared with the 1.0% it had reckoned on in December. Inflationary pressure is set to ease again next year (see graph).
“The conditional inflation forecast is based on the assumption that the SNB policy rate remains at −0.75% over the entire forecast horizon,” the National Bank said in its monetary policy assessment of 24 March. Alongside the negative interest rate, the governing board confirmed the second pillar of its expansive monetary policy that day, stating that it was willing to intervene in the foreign exchange market as necessary in order to counter upward pressure on the Swiss franc. “The Swiss franc remains highly valued,” the SNB reported. On paper the domestic currency guardians have thus remained true to their principles. Verbally, however, there were definitely signals of a change of course. “We are not by any means powerless,” explained SNB chairman Thomas Jordan with an eye on the higher inflation forecast. The National Bank would take all necessary measures to maintain price stability in the medium to long term.
It is still entirely unclear whether and, if so, when the SNB will turn the interest rate screw. Meanwhile, the tide on the CHF bond markets has visibly turned in the last few weeks and months. Only in the short-dated segment are yields still negative. The return on ten-year Swiss government bonds is now just under 0.87%, some 100 basis points more than at the end of 2021. That puts the CHF yield over this term level with that of German government bonds (see graph). This is astonishing insofar as the European Central Bank has more or less heralded the turnaround in interest rates. While the ECB stuck by the key rate of 0.00% at its latest meeting, it is looking to stop the purchase of billions of euros in bonds as early as the summer. This could be followed by a rise in interest rates as the next step.
What is certain is that the cocktail of inflation, geopolitics, worries of recession and higher interest rates is not particularly to the taste of equity investors. Although the SMI has been able to more than make up the setback following the outbreak of war, the index is still trading a good way off the all-time high reached at the start of the year. What is more, volatility has increased markedly over the last few weeks. Against this background, the general rise in yields is a little bit of good news. It is contributing to the comeback of a classic, the capital protection certificate, on the market for structured products. Interest rates play a key role in the conditions for this investment vehicle, the fundamental principle being that the higher bond yields go, the more attractive the issues become. To give an example, investors can again invest in Swiss blue chips with a full capital guarantee while participating in rising quotations to a certain extent. Such a combination, which particularly appeals to safety-oriented investors, was for a long time inconceivable when interest rates were at their lowest.
Source: SNB; as at: 24.03.2022. Past performance is not a reliable indicator of future performance.
Source: Thomson Reuters; as at: 19.04.22 Past performance is not a reliable indicator of future performance.
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