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EXPLAINED: What the weakening euro means for Switzerland’s residents

After reaching parity with the euro in March, the Swiss franc has continued to strengthen against the single European currency. This trend is expected to continue, experts say. What does that mean for Swiss residents?

EXPLAINED: What the weakening euro means for Switzerland's residents
Below parity: Swiss franc trumps the euro. Image by günter from Pixabay

The value of the European currency has been falling since the start of the war in Ukraine in February, while the Swiss franc rose to reach parity with the euro in March.

The weakening trend for the euro and the strengthening one for the franc has been continuing ever since.

Today, 1 franc is worth 1.0387 euros, up from 0.9643 in January 2022.

The franc should remain solid and below parity with the euro in the coming months, economists say. Analysts at Raiffeisen bank, for instance, predict a 0.98 euro-franc rate over the next 12 months.

Why is the franc gaining strength against the European currency?

In fact, the franc has always been strong, due mostly to Switzerland’s stable and resilient economy, which has managed to resist the many crises that have weakened other countries’ financial markets.

During the 2008 global recession, investors from all over the world stashed their money in Switzerland for safekeeping. Because of this influx of money, the value of franc rose dramatically — from around 0.7 francs per euro to near parity.

Another important factor is Switzerland’s relatively low national debt, which, together with the European debt crisis, has boosted the franc.

However, a strong franc is not good for Swiss economy. The reason is that Switzerland relies heavily on exports — particularly pharmaceuticals, machinery, instruments, and watches. Over 40 percent of the country’s production is sent to its main trading partners in the European Union. 

Exports are the backbone of Switzerland’s prosperity and economic growth. But when the franc rises, it makes Swiss products less competitive — that is, too expensive — in eurozone markets.

In 2011, to keep the franc’s value from rising, the Swiss National Bank (SNB) had capped the franc at 1.2 euros, devaluing the Swiss currency by 8 percent. The central bank took this drastic step by printing billions of francs and using them to buy foreign money, pushing its foreign currency reserves to record highs.

However, in 2015, the SNB abandoned the cap, saying it was no longer justified. The franc’s value immediately soared by around 30 percent. 

READ MORE: EXPLAINED: Why does Switzerland want to keep the Swiss franc weak?

Why is the situation different now?

The SNB has changed its monetary policy in June 2022, raising its main key rate from -0.75 percent to -0.25 percent.

This decision strengthened the franc by making investments in the national currency more attractive. It is also expected to weaken inflation —currently at 3.4 percent — which is now SNB’s top priority.

“The SNB no longer considers that the Swiss franc is overvalued” and therefore “no longer fights with all its might against an increase in the price” of the Swiss currency, according specialists at the St. Gallen bank.

READ MORE: EXPLAINED: What does euro-franc parity mean for Switzerland?

What does all this mean for consumers in Switzerland — and economy in general?

Since, as mentioned above, Swiss economy depends on exports to the European Union, stronger franc / weaker euro will impact this sector.

“To avoid losses, some Swiss manufacturers are forced to raise the price of their export products to compensate”, according to Moneyland consumer platform.   

“The result is that Swiss products become more expensive for foreign customers. In the worst case, Swiss companies can lose foreign customers because their prices are no longer competitive”.

The same is also true for the tourism industry.

“Holidays in Switzerland are more expensive for people visiting from other countries. The stronger the franc gets against the euro, the higher the prices in Switzerland are for tourists from eurozone countries”, Moneyland said.

On the other hand, for companies which import goods and services, a strong Swiss franc is a good thing.

“They profit from the franc-to-euro parity to the same extent that exporting companies suffer from it”.

However, as Moneyland points out, you, the consumer, may not necessarily benefit from the lower costs of imported goods. “Swiss importers are not obligated to pass on extra profits earned on exchange rates to customers – and many of them hardly lower their price tags to match, or do not reduce prices at all”.

But there are areas where consumers in Switzerland benefit from the higher franc / lower euro ratio.

For example, holidays abroad, especially in the eurozone countries, will become cheaper: “A holiday which costs a total of 2,000 euros cost you 2,200 francs when the exchange rate was 1.10 francs to the euro. When the franc and euro are equal, the same vacation costs you 200 francs less”.

Now, when the exchange rate is even more favourable (for the Swiss), vacationing abroad is even more affordable.

Then, there is the ‘shopping tourism’, a frequent activity for people living in border regions.

Shopping abroad will become cheaper than before for people who earn their salaries in francs — including cross-border workers.

Buying from online stores in neighbouring countries is also more attractive when the franc is strong, especially as from January 1st, Swiss customers are no longer denied access to foreign online shopping platforms.

However, it is important to calculate the cost of delivery and customs duties to make sure the purchase is actually a good value.

Also, keep in mind that the cost of goods and services has gone up in neighbour countries as well, where the inflation rate is much higher than in Switzerland.

Last but not least, if you are into investing, a strong franc means that “Swiss investors can get more foreign assets for less”, Moneyland said.

Should you buy euros now?

It depends on whether you are patient enough to hold on to the euros for a while before converting them back into francs.

That is because the euro will continue to weaken against the franc, so it is not yet at its lowest point.

 “The time to buy euros has not yet come”, said Elias Hafner, foreign exchange strategist at Zürcher Kantonalbank. “There is a lot of uncertainty about energy supplies to the eurozone, so the euro’s weakness is likely to continue for a while.

READ MORE: Switzerland ‘an island of bliss’ compared to US, chief economist says

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COST OF LIVING

EXPLAINED: What the steep rise in Swiss interest rates could mean for you

The Swiss National Bank (SNB) raised the key interest rate by 0.75 percentage points, putting it back in positive territory at 0.5 percent.

EXPLAINED: What the steep rise in Swiss interest rates could mean for you

As announced by Switzerland’s central bank on Thursday, the rate change applies from Friday, September 23rd.

“The bank’s aim is to counter the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected”, according to SNB.

The SNB has not said how long the current rate will be in place, but noted that “it cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term”.

READ MORE: Swiss central bank announces big rate hike in inflation fight

Inflation rate in Switzerland currently stands at 3.5 percent. While it is much lower than in the eurozone, where it exceeds 9.1 percent, it is still higher than its usual rate of below 1 percent.

Why has the SNB raised the interest rate for the first time since 2015?

For the same reason that other central banks have done so, including the European Central Bank and the Federal Reserve in the US: price stability

In general, central banks see increasing interest rates as a response to rising inflation: higher rates help reduce the overall level of demand and, subsequently, also the upward pressure on prices.

Whether this strategy will work is another matter.

The SNB rate hikes will “have a fundamentally dampening effect on inflation”, Felix Oeschger, analyst at Moneyland price comparison platform, told The Local.

“However, it is far from clear whether these alone will be enough to curb inflation”, he added.

One for the reasons for this uncertainty, Oeschger said, is that “the energy crisis and the high prices of some agricultural commodities, such as wheat, are a result of the Ukraine war. These prices are more difficult to influence with key interest rate increases”.

In its inflation forecast, the SNB predicted the inflation will drop to 2.4 percent in 2023.

But “considering that the SNB has continuously revised its inflation forecasts upward since December 2021, it is quite conceivable that inflation in Switzerland will continue to rise or at least remain high”, Oeschger pointed out.

READ MORE: EXPLAINED: The groups most affected by inflation in Switzerland

Will the Swiss consumers benefit (or not) from the higher interest rates?

It depends on what you are looking to buy.

If you are planning to buy big-ticket items that are usually purchased with credit — like homes — then you may have to dig deeper into your pockets.

If you already have a fixed-rate mortgage, then you are safe from rate increases for the term of your mortgage.

But for new buyers or those with variable-rate mortagages, things may be more problematic.

“It is not excluded that mortgage interest rates will reach 3 to 4 percent next year”, from the current 2.6 to 3.1 percent, according to Donato Scognamiglio, director of real estate platform Iazi.

What about rents?

Tenants may not be better off than homeowners.

Many have already received notices of higher rents to compensate for increased costs of energy.

Now another charge could be added as well, though probably not immediately.

“Rents will go up, but only when the reference interest rate itself is raised”, Scognamiglio said.

The benchmark interest rate is the average of all mortgage interest rates. If the reference rate increases by 0.25%, tenants will have to pay 3 percent more rent. “I expect this to happen next year”, he said.

But it is not all bad news; higher interest rates will yield some benefits as well.

For instance, if you have certain types of investments, you may see more money coming in.

“I expect yields on fixed-income financial products such as bonds to continue to rise”,  Oeschger said.

“In the case of medium-term notes issued by Swiss banks, we have already seen significant increases since the beginning of the year”, he added.

As for savings accounts, however, “the banks have so far been very hesitant to raise interest rates, but if monetary policy tightens further, we can expect interest rates to rise slightly here as well”.

Generally speaking, what will become cheaper and more expensive for consumers?

The bad news here is that everything that has to do with energy, even indirectly, will become more expensive.

This includes “heating, transport costs, electricity and also food”, another Moneyland expert, Ralf Beyeler told The Local.

READ MORE: Pasta up by 13 percent: How food and energy prices in Switzerland are rising

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