Interest rates

Inflation and interest rates: how Switzerland is different

Inflation will also be felt in Switzerland, according to Nannette Hechler-Fayd’herbe, although Swiss inflation is still low compared to other countries. Fabio Nay (Live Fabrik GmbH)

It will take some time before inflation drops again, according to Nannette Hechler-Fayd’herbe, chief investment officer at Credit Suisse. The economist expects an upcoming rise in interest rates in the United States, and a similar rise in Switzerland in 2022 can no longer be ruled out.

This content was published on April 8, 2022 – 09:00

Fabio Canet

“Inflation is already making itself felt – also in Switzerland,” says Nannette Hechler-Fayd’herbe, Chief Investment Officer for Wealth Management at Credit Suisse and global head of the bank’s internal research department. Indeed, inflation in Switzerland currently stands at 2.2% – and thus above the National Bank’s target of “less than 2%”. The last time inflation in Switzerland was this high was before the 2008 financial crisis.

Prices will rise further due to the “geopolitical shock”, according to Hechler-Fayd’herbe. She refers to the Russian war in Ukraine, which is once again driving up oil and gas prices.

Compared to other countries, however, inflation in Switzerland remains low. In the United States, prices have recently increased by 7.5% year-on-year. This is the largest increase since 1982. At 5.8%, inflation in Europe is also well above the target set by the European Central Bank (ECB). Both the US Federal Reserve and the ECB are targeting an inflation rate of 2%.

How is Switzerland different?

Hechler-Fayd’herbe sees two main differences between Switzerland and other countries. First, rents in Switzerland are not indexed, so they do not automatically increase with inflation. Secondly, electricity prices in Switzerland fluctuate less than elsewhere. These two factors mean that prices in Switzerland are rising relatively slowly. “I’m currently not worried about inflation in Switzerland,” she says.

The situation in the United States is more complicated. “It will certainly take some time before US inflation drops again,” adds the expert.

Inflation expectations are at the heart of the work of Hechler-Fayd’herbe. These increase, for example, when people expect central banks to react too weakly to inflation. Interest rates should rise to 2.75% by the end of 2023 to keep inflation under control, she said. Its assessment therefore more or less coincides with that of the US Federal Reserve, which estimates that an interest rate of 2.5% will stabilize inflation in the longer term.

“But the question will be whether the Fed can really raise interest rates above 2%,” said the economist. If a central bank raises interest rates too quickly, short-term loans suddenly become more expensive than long-term ones. In the jargon, this is called an inversion of the yield curve.

Swiss interest rates could rise

Many experts, including Hechler-Fayd’herbe, view inverted yield curves as a bad omen. “Although inverted yield curves do not trigger economic crises, they are often an indicator of an impending slowdown or recession,” she says. It is therefore possible that the Fed will refrain from raising interest rates too much. She thinks that one thing is certain in any case: “inflation will not relapse so quickly”.

Credit Suisse expects a reversal of Swiss monetary policy in 2023. By then, more than 180 months will have passed since the last interest rate hike by the Swiss National Bank. Its key rate is currently 0.75%.

However, the National Bank’s key interest rate could rise soon, Hechler-Fayd’herbe believes, for example if the ECB raises interest rates much earlier than expected. The ECB no longer excludes it. And a higher inflation forecast by the Swiss National Bank could also lead to an earlier rise in interest rates in Switzerland: “If the National Bank forecasts inflation above 2%, its key rate could rise again as soon as 2022,” says Hechler-Fayd’herbe.

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The author Fabio Canetg obtained his doctorate in monetary policy from the University of Bern and the Toulouse School of Economics. He is now a lecturer at the University of Bern.

As a journalist, he works for SRF Arena, Republik Magazin and SWI swissinfo.ch. He hosts the monetary policy podcast “Geldcast”.

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Translated from German by Julia Bassam.

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