The idea that we’ve entered a new, inflationary era post-pandemic may be less robust than many believe. A glance at Switzerland reveals an intriguing vignette that challenges the assumptions surrounding global central banking.

The Post-Pandemic Economic Landscape

The world has faced a barrage of challenges: a global pandemic, soaring inflation, energy crises, and escalating geopolitical tensions. These factors marked the end of a decade characterised by deflation and near-zero interest rates.

From 2022 to 2023, policymakers embarked on a historic tightening of monetary policy. However, many economists are starting to predict that this new world, defined by de-globalisation and high public debt, will lead to persistently elevated inflation and interest rates.

Switzerland’s Divergent Path

Enter the Swiss National Bank (SNB). In March, the SNB surprised many by becoming the first major central bank to pivot towards easing. This week, they returned to what they consider a “neutral” policy rate of just 1%. With promises of further cuts on the horizon, it’s not far-fetched to speculate that Switzerland could flirt with zero—or even negative—interest rates within a year.

Key Insights from the SNB’s Actions:

• Inflation Levels: Swiss inflation has cooled to a mere 1.1%, comfortably within the 0-2% target range for over a year. The central bank has even slashed next year’s inflation forecast to just 0.6%.
• Currency Strength: The Swiss franc’s strength—hitting nine-year highs against the euro—plays a crucial role in the SNB’s policy. This overvalued currency is squeezing prices and straining exporters.

A Return to Quantitative Easing?

Given the challenges posed by a strong franc, we might soon see a resurgence of the SNB’s unique brand of quantitative easing. Historically, the SNB expanded its balance sheet to over 1 trillion francs (about $1.1 trillion) in an effort to counter the franc’s rise.

With some banks, like UBS, suggesting that the SNB’s early easing may have reached its limit, there remains uncertainty. The SNB’s path forward will depend significantly on global inflation trends and geopolitical developments.

What Does This Mean for Global Central Banking?

Switzerland’s situation raises a vital question: What has materially changed since the pandemic to alter the assumptions about demand, prices, and interest rates globally?

1. ECB’s Dilemma: The European Central Bank (ECB) appears to be grappling with its inflation spikes but is also expected to adjust its rates in light of disinflationary pressures. Swaps markets indicate that the ECB may undershoot its 2% target in the coming years.

2. Bank of Japan: Meanwhile, the Bank of Japan is beginning to normalise interest rates after years of zero or negative rates. Should inflation pressures subside again, the extent of this normalisation may be limited.

3. China’s Challenge: With China now confronting deep-rooted issues from its property market collapse, it is also ramping up monetary easing. The path for China might eventually lead to a world with zero rates as well.

4. U.S. Federal Reserve: The U.S. Federal Reserve finds itself in a different scenario but is also contemplating the possibility of undershooting its inflation target as it navigates towards a neutral policy.

Conclusion: Same Old Challenges?

While the SNB’s current situation may seem like a unique Swiss conundrum, the broader implications for central banks worldwide are significant. The experiences of Switzerland, Europe, and beyond suggest that the challenges faced by central banks are far from resolved.

As we navigate this intricate landscape, one truth emerges: the more things change, the more they remain the same.

The ongoing shifts in global economic dynamics will undoubtedly influence future monetary policy decisions. Yet, the question remains—how much has really changed since the pandemic, and are we destined to repeat the cycles of the past?

Suggested links for further reading

• Swiss National Bank: Learn more about the SNB
• Quantitative Easing: Understand quantitative easing
• European Central Bank: Explore the ECB’s policies
• Bank of Japan: Find out about the BoJ
• U.S. Federal Reserve: Learn about the Federal Reserve