Swiss inflation in March spiked to 0.6 percent month-to-month and 1 percent year-on-year, higher than the expected 0.5 percent and a reading of 0.5 percent in February.
This caught the market by surprise and the Swiss franc spiked over 100 pips against the dollar and euro. Some analysts were quick to dismiss the long-term implications of this data, arguing that Switzerland favors a weak currency in order to power an export-led recovery.
While that’s true (and Switzerland did intervene last year to weaken their currency), Switzerland is also facing inflationary pressures.
First, there is the consumer inflation, which jumped in March. If it continues to accelerate, the Swiss National Bank (SNB) will be forced to act. Perhaps more importantly, there is the brewing Swiss real estate bubble.
SNB member Jean-Pierre Danthine said a few days ago that “for the real estate sector, interest rates are clearly too low at the moment.”
However, he was hesitant to call for a rate hike because he feared the effects of a strong Swiss franc on the domestic economy.
The situation, though, has changed. The European Central Bank (ECB) will raise rates tomorrow while the Bank of England faces increasing pressures to do so. In response, the euro and pound sterling have significantly outperformed the Swiss franc recently.
The euro zone is by far the largest export destination of Switzerland; the rise in the euro, therefore, gives the ECB more room to raise rates. The UK is also a large export destination for Switzerland and the same logic applies there.
Sooner or later, the SNB must follow in the footsteps of its European counterparts.
The euro has already begun its rate-hike expectation rally. The pound sterling is having its own.The Swiss franc – facing inflation pressures and free from peripheral woes – will eventually catch up.
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