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Ensuring stable prices is the most important task of central banks. The Swiss National Bank (SNB) defines price stability as an increase in consumer prices of less than 2 percent.
Now that target has already been reached: consumer price inflation fell from 2.2 percent to 1.7 percent in June. Inflation has not been this low since the beginning of 2022. Since last summer, the SNB has increased its main interest rate in five steps from -0.75 to +1.75 to rein in inflation, which has meanwhile climbed to 3.5 percent. Does the fact that inflation is now below 2 percent mean that the SNB is doing its job and doesn’t need to raise rates any further?
Unfortunately, things are a little more complicated.
In fact, there is less and less evidence for further rate increases. But this has little to do with the recent fall in inflation to 1.7 percent. The main reason for this is the normalization of energy prices. A year ago, the price of oil was a third as high as it is today because of the Ukraine war. The fall in gasoline and heating oil prices is now fully reflected in inflation and reduces inflation. SNB had also expected a decrease in inflation in its forecasts at the beginning of the year due to this so-called base effect.
Jordan does not trust the fall
However, much more important for assessing inflation is the behavior of prices that is not dependent on external factors such as the price of oil. These are also things the central bank can influence by managing aggregate demand. The good news for the SNB is that inflation has receded in this area as well. Core inflation 1 reported by the Federal Statistical Office, excluding energy and seasonal goods, is 1.8 percent. The standard international definition of the core rate, excluding energy and food prices, is only 1.2 percent.
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This article was originally published on the paid service of handelszeitung.ch. Blick+ users have exclusive access as part of their subscription. You can find more exciting articles at www.handelszeitung.ch.
This is the biggest difference between the US and euro countries: core inflation is higher than general inflation there. In Spain, for example, inflation also dropped rapidly below 2 percent due to the normalization of energy and food prices, but the core inflation rate is still very high at 5.9 percent.
With regard to the current inflation dynamics, the SNB has almost no reason to raise interest rates any further. So why did SNB Chairman Thomas Jordan (60) say on SRF radio just a week ago that monetary policy might not be tight enough?
Because he doesn’t trust the fall much and doesn’t want to give the green light ahead of time. It is extremely difficult to assess how inflation will develop after the positive base effects stemming from falling energy prices have disappeared. Although the SNB recently lowered its inflation forecasts for the current year, it raised its forecasts for the next year.
A scorched labor market and rising wages
There is still no sign that the underlying drivers of inflation are diminishing: the labor market remains extremely dry and wages are likely to rise again. Unlike Germany, Switzerland need not fear a recession, because consumers have hardly lost their purchasing power and are lavishly spending their savings during the pandemic. They also accept higher prices, as evidenced by the high demand for plane tickets, restaurant visits and concert tickets.
The second reason for Jordan to be cautious is the developments in the euro area. As long as the European Central Bank puts the brakes on inflation, the SNB will also be under pressure. Otherwise, the interest rate spread will widen too far, weakening the franc that has so far kept import inflation moderate. However, if the ECB deviates from its chosen course in the summer, there is a good chance the SNB will remain silent at its next meeting in September.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
