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SNB CHF Blog: A beleaguered central bank in the dangerous world of global macro and euro crisis

SNB CHF Blog: An economic encyclopaedia on the Swiss safe-haven and its central bank written by an association of independent financial advisers.

Swiss Price Inflation: HICP: +0.1% y/y CPI 0.0% Avg. Yearly Money Inflation (M3) 8.1% y/y, Avg. Yearly Credit Inflation 3.9%
Other HICPs Y/Y: Eurozone 1.1 0.9, 0.7,0.5 0.4% 0.38%  France: 1.0 0.8 0.8 06 0.5%  +0.5% Italy: 1.2 0.8 0.7, 0.5  0.4 0.2 0.1 +0.1%, Spain: 0.5 0.3, 0.2, 0.0 -0.2% Germany:1.4% 1.3% 1.2%1.1%0.6% +0.8% (sources inflation.eu,  Eurostat and investing.com)


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 CPI inflation might even be higher in some years. The CHF real eff. FX rate overvaluation talk disregards completely the continuous immigration into Switzerland. Therefore 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 immigration, higher Swiss GDP growth and relatively weak Swiss wage hikes. In particular, in the housing sector these flows will build up wrong resource allocations. In some years stronger global growth and high German wage increases will boost inflation in Germany and partially in Switzerland but Southern Europe will still struggle. By tradition, Germans will move funds into Switzerland in order to protect them from inflation and the ECB. At that moment the SNB will need to hike interest rates - possibly before the ECB. The Swiss "Soros moment" will arrive and the EUR/CHF will fall under 1.20. The consequence for monetary policy will be:
  1. Either the SNB fights inflation and the Swiss real estate bubble, and allows a CHF appreciation. This implies selling FX reserves below the price of EUR/CHF 1.20 and/or accumulating more and more reserves.
  2. 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, that the EUR/CHF falls under 1.20 is the only feasible solution. Whether the SNB suffers a big loss depends on the income on seigniorage it can generate as opposed to FX rate losses. Hence SNB's monetary policy will switch to a managed currency appreciation like the Singapore or Chinese central banks already do for years. 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.


Permanent link to this article: http://snbchf.com/

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