Stressed are the cheesemakers — Switzerland’s, at least. As the European Central Bank lowered eurozone interest rates to weaken the euro and help the bloc out of its deflationary slump, businesses in neighbouring countries have counted the cost.
Its competitiveness wounded by the strong Swiss franc, Switzerland has imported more cheese than it has exported in some recent months — an unhappy state of affairs for producers of Gruyère and Emmental. “It would be great to get back to a reasonable exchange rate,” says Manuela Sonderegger, of Switzerland Cheese Marketing.
Now she might be close to getting her wish. With financial markets increasingly convinced that the ECB is moving towards reining in its stimulus programmes as part of a worldwide “normalisation” of monetary policies, the euro is rising and Swiss franc has fallen to its lowest level in two-and-a-half years.
The acceleration in eurozone economic activity “will transmit itself across Europe”, says Stefan Gerlach, chief economist at EFG bank in Zurich. “I think we’re going to get out of the whole negative interest rate, deflation era pretty soon.”
For countries on the fringes of the eurozone, such as Sweden and Switzerland, normalisation cannot come too soon. They — more specifically, their central banks — were placed in an invidious position by the ECB’s aggressive tactics to revive the eurozone. Facing the knock-on effects, they had to take even more extreme measures in a sometimes futile attempt to stop their currencies appreciating and hitting exporters.
Both the Swiss National Bank and Sweden’s Riksbank pushed interest rates deep into negative territory — raising fears of long-term damage to the economy and financial systems.
“It becomes very hard when you’re next to such a dominant player. In that kind of environment, the smaller central banks are forced to experiment,” explains Anna Breman, chief economist at Swedbank.
In Sweden, the worry has been about an overheating economy, especially the housing market. Gross domestic product rose 1.7 per cent in Sweden in the second quarter, its fastest pace for seven years. House prices have increased by about one-third in the past three years, with record household indebtedness worrying regulators.
One top Swedish executive adds: “It is utterly remarkable that GDP is growing as strong as anywhere in Europe, unemployment is low, and yet we still have negative rates. The Riksbank will have to change soon otherwise it could have dramatic consequences in the future.”
“There is a sense that a lot of people would welcome a rate hike,” says Ms Breman.
Switzerland was forced down its own extreme path because of fears that the strength of the Swiss franc would hit economic growth. Swiss policymakers know that at times of economic uncertainty, the country’s status as an investor “haven” sucks in capital from other countries and puts upward pressure on the franc.
The Swiss national bank tried to cap the Swiss franc to limit its value against the euro but gave up early in 2015. The Swiss franc soared even though the SNB slashed its main policy interest rate to minus 0.75 per cent.
The biggest distortions — and so maybe now the biggest sighs of relief — were felt by Swiss banks, whose profits were eroded. Worse, economists feared that if negative official interest rates meant banks imposed charges on ordinary bank accounts, customers would take their money out — causing a dangerous bank run. That did not happen. Swiss banks instead cross-subsidised retail deposits by expanding mortgage lending.
But Swiss bankers warned the situation was fragile — and that if the SNB had pushed interest rates deeper into negative territory, the consequences were unpredictable.
Now “this kind of risk is off the table, which is a relief,” says Jürg Schnider, head of treasury at Zürcher Kantonalbank.
A similar dynamic is under way in the Czech Republic, where the central bank this year abandoned a cap on the koruna that it imposed in 2013 to ward off deflation. Analysts think the bank could now go a step further and raise interest rates for the first time since the crisis, possibly as soon as this week.
“The central bank has been sending more hawkish signals and we think they are likely to raise rates on Thursday,” says Piotr Kalisz, head of CEE economics at Citi Handlowy in Warsaw. “GDP is growing, wages are rising faster, and the central bank has done a good job in boosting inflation, so it doesn’t make sense to have rates at historic lows any more.”
Inflation has picked up in Switzerland, where it has been negative for much of the past two years, as well as in Sweden, and markets are anticipating rises in official policy rates across the continent.
A euro now buys more than 1.14 Swiss francs — up from near parity in January 2015. “We know that not everything is possible but we hope that the SNB can at least hold the SFr1.10 level [against the euro],” says Jean-Philippe Kohl, head of economic policy at Swissmem, the Swiss industry association.
Even thought the Swiss and Swedish central banks will welcome higher rates, they may still not rush. Riksbank policymakers are wary, remembering how they did so in 2010-11, only to have to cut them again shortly afterwards.
According to the minutes of the Riksbank’s July meeting, one deputy governor said that Sweden would probably have to continue with quantitative easing next year if the ECB carries on with its own asset purchases.
Stefan Ingves, the Riksbank governor, said that inflation needed to be at or close to its 2 per cent target for longer to justify a rate increase. “Inflation just touching 2 per cent in the short term is not stable enough,” he said, according to the minutes.
Swiss borrowing costs could take even longer to rise. The SNB will want to maintain the differential with eurozone interest rates — so will almost certainly not raise until after the ECB lifts interest rates, which might not be until 2019.
One Swiss banker says: “The SNB will not be a kamikaze player.” But the eurozone’s recovery means that the Alpine state and other neighbours can at least see the stress starting to ease.
Additional reporting by James Shotter.