After paradigm shift: SNB expands FX sales in early 2023

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Between January and March 2023, the central bank sold foreign currency worth CHF 32.3 billion, according to SNB statistics released on Friday. Foreign exchange sales in the fourth quarter of 2022 were still CHF 27.3 billion, CHF 739 million in the third quarter and only CHF 5 million in the second quarter.

Prior to this, he sometimes bought foreign currency on a large scale to prevent the Swiss franc from gaining too much value. For example, 21.1 billion CHF worth of foreign currency was purchased in 2021 and almost 110 billion CHF in 2020.

However, after a paradigm shift, foreign exchange sales come to the fore. The SNB uses this instrument to combat inflation because currency sales lead to a stronger Swiss franc. Because with a franc that appreciates, less inflation is imported from abroad. As is known, inflation in the Eurozone and the USA is significantly higher than in Germany.

In addition to selling foreign currency, the SNB – like other central banks – also relies on higher interest rates to fight inflation. Swiss central bankers led by Thomas Jordan raised the so-called SNB key rate by 25 basis points to 1.75 percent just last week. They progressed a little more slowly after gains that were quite aggressive before.

SNB boss Thomas Jordan has made it clear that further increases cannot be ruled out if inflationary pressure does not fall sustainably towards the desired target range of 0 to 2 percent.

Although inflation has fallen significantly since February to 2.2 percent in May, it is still above the SNB’s target range. First of all, it should be expected that the decline will not continue on its own in the medium term. Finally, rising rents due to rising interest rates should also contribute to this.

Many economists assume that the SNB may again tighten monetary policy in their next situation assessment. On the one hand, this means renewed foreign exchange sales on a larger scale – at least in the short term. On the other hand, they receive from SNB boss Jordan that he will soon raise interest rates at least slightly.

“The SNB should continue to tighten its monetary policy,” said UBS economist Alessandro Bee. But his colleague at Bank SYZ, Adrien Pihoud, added that the slowdown in rate hikes reflects the fact that the SNB is now entering a “phase of finer control” over monetary policy.

(SDA)

Source :Blick