Swiss officials say they are increasingly willing to intervene as the country’s currency has appreciated significantly in the wake of the Iran war, but doing so risks sparking a new conflict with the White House. The Swiss National Bank announced on Thursday that it would keep its key interest rate unchanged at 0%, as expected. However, policymakers said, “Given the conflict in the Middle East, the Swiss central bank is increasingly willing to intervene in the foreign exchange market.” “With this, the SNB will counter rapid and excessive appreciation of the Swiss franc, which would endanger price stability in Switzerland,” it added. The Swiss franc, widely considered a safe-haven asset, has been buoyed by increased market volatility. Last year’s turmoil and uncertainty caused the franc to appreciate against the US dollar and against its regional peers, the euro and the pound. The strong franc is putting deflationary pressure on Switzerland’s economy, which briefly slipped into post-inflationary territory last year, and threatening the country’s exports. Switzerland’s annual inflation rate is just 0.1%, and a rate cut aimed at weakening the franc would mean a return to seven years of unpopular negative interest rates until 2022. Alternatively, policymakers can sell Swiss francs and buy foreign currency (usually euros, but sometimes dollars) to move prices. However, under President Donald Trump, the United States has aggressively attacked the SNB’s currency intervention strategy. CHF= 1Y Line USD/CHF Cross Rate Last year, the US Treasury added nine countries to its “watch list” of trading partners whose “exchange practices and macroeconomic policies merit close attention” in light of accusations of currency manipulation targeting Switzerland during President Trump’s first term. Swiss authorities deny these allegations. The United States imposed a 39% tariff on Switzerland last year, one of the highest imposed on any country, which the White House blamed on “currency manipulation and trade barriers.” The Swiss central bank said in its monetary policy update on Thursday that while rising energy prices have tilted inflation risks to the upside in the coming quarters, the medium-term inflation outlook remains “substantially unchanged.” Swiss investment bank UBS said in a note Thursday morning that rising geopolitical tensions are supporting demand for currencies considered “safe haven” assets such as the Swiss franc. SNB Chairman Martin Schlegel said in an interview with CNBC’s Carolyn Ross on Thursday that the central bank’s board wants to limit any excessive or rapid appreciation of the Swiss franc to ensure price stability in Switzerland. “(We) review monetary policy quarterly, where we decide on the use of tools such as interest rates and currency intervention,” he said. “And at this meeting, we came to the conclusion that a greater willingness to intervene in foreign exchange markets is what monetary policy needs now.”Switzerland signed an agreement with the United States late last year to reduce tariffs to 15%. But even after the Supreme Court struck down President Trump’s tariff plan, the country was once again under investigation by the Trump administration, which last week launched Section 301 investigations into 16 trading partners. If an investigation finds that Swiss policies or practices are “unreasonable or discriminatory and burden or restrict U.S. commerce,” the U.S. Trade Representative would have the authority to impose new tariffs or other import restrictions on Switzerland. Asked on Thursday whether the world understands that the Swiss central bank’s motivation for foreign exchange intervention is to stabilize prices rather than to gain a competitive advantage, Schlegel reiterated that the Swiss central bank has “traditionally intervened in foreign exchange markets only for monetary policy reasons.” “This means ensuring appropriate financial conditions for Switzerland and not giving unfair advantages to Swiss exporters or preventing current account adjustment,” he told CNBC. Maxime Botteron, an economist at UBS, told CNBC that the Swiss central bank maintains a small easing bias despite rising energy prices and the associated upside risks to inflation, underscoring its growing willingness to intervene in foreign exchange markets. “We don’t know whether the Swiss National Bank has actually intervened since the beginning of the month, but we think it is likely that it did,” he said. But Botteron added that UBS does not foresee prolonged intervention in foreign exchange markets like the Swiss central bank did between 2015 and 2017. “Sustained increases in energy prices could raise global recession concerns,” Botteron said. “In such a scenario, upward pressure on the Swiss franc would continue to persist further, making a rate cut into negative territory more likely by the Swiss National Bank, thereby reducing the need for currency intervention.” Derek Halpenny, head of EMEA global market research at MUFG, told CNBC that the Swiss National Bank’s comments Thursday suggest the central bank is more open to currency intervention than negative interest rates. With the euro-franc cross rate below the 0.9 level, he said the risk of geopolitical turmoil increasing the value of the franc and inflicting further deflationary damage on the Swiss economy “will be something that the Swiss National Bank will try to contain.” Halpenny, like Botteron, said the price movements seen since March 16, when the euro fell back below 0.9 francs, suggested that the Swiss central bank may have already intervened to counter an excessive rise. Halpenny added that “it is questionable whether U.S. concerns will have much of a role in the context of intervening in these volatile times and in future periods of heightened risk-off conditions,” but added that the Swiss central bank is “likely to think carefully about how often it intervenes actively.” “If upward pressure persists, at some stage we will probably move to negative interest rates passively,” he said. “But for now, if necessary (and has not already been done), that step will be a carefully chosen Swiss franc selling intervention.” Correction: This article has been updated to correct the reference to Maxime Botteron.
