Thursday's decision by Switzerland's central bank (SNB) came amid strong pressure from industry, particularly from the key watchmaking exports sector, to rein in the rise of the franc.
The franc has accelerated significantly against the euro in recent months, approaching its peaks of late 2023 and early 2024.
Since mid-July, the euro has lost around three percent of its value against the Swiss currency.
On the morning of September 26th, the Swiss franc was up 0.14 percent against the dollar, at 0.8491 francs. It was up 0.11 percent against the euro, at 0.9456 francs.
The SNB lowered its inflation forecast to 1.2 percent for 2024, 0.6 percent for 2025 and 0.7 percent in 2026.
In its statement the bank hinted at why the strong franc is a problem for the economy.
"Growth is likely to remain rather modest in Switzerland in the coming quarters due to the recent appreciation of the Swiss franc and the moderate development of the global economy," the central bank said.
Nadia Gharbi, senior economist at Pictet Wealth Management said: "While the strength of the Swiss franc was useful during the post-Covid inflation surge, it has now become a deflationary force that is difficult for the SNB to control."
Companies focused on export trade face challenges
While the strong Swiss franc spells good news for Switzerland-based corporations that primarily focus on importing products, the strong local currency does not benefit those companies that are export-based.
And 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.
It is fair to say that 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.
Some Swiss companies may opt to increase the price of their export goods to make up for the lost money which in turn means that the product itself would be more expensive for customers abroad to purchase. This could of course also result in less business due to a lack of competitiveness in terms of pricing.
In 2022, Switzerland’s foreign export trade amounted to 383 billion Swiss francs, which included manufactured goods – such as its popular watches and machine products - being sold to customers in the United States, Germany, China, and other European countries.
Fewer tourists travel to Switzerland
The strong Swiss franc may very well enable Switzerland-based earners to enjoy numerous stays abroad, but it also makes holidays in Switzerland very pricy for overseas tourists. This in turn has a negative effect on the Swiss economy.
However, unlike many other industries, the tourist industry has no way of outsourcing its business and does not enjoy the same import profits as other industries might, which means that the strong Swiss franc brings next to no benefits for the industry.
But there are some benefits of a strong franc for workers in Switzerland not least when it comes to cross-border shopping or holidaying abroad.
READ ALSO: Are there any benefits of a strong franc for people in Switzerland?
Comments