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A further cut to negative Swiss interest rates could have the undesired effect of strengthening the franc as foreign investors pile into the country’s outperforming stock market to reap superior returns over bonds, former Swiss National Bank Chief Economist Kurt Schiltknecht wrote in daily Neue Zuercher Zeitung.
“These investment opportunities don’t go unnoticed by foreign investors and often result in upward pressure on the franc,” Schiltknecht said in an article published on Saturday ahead of the SNB’s monetary policy decision on Sept. 19 and after the European Central Bank announced its latest easing package this week.
The Swiss Market Index, which includes Europe’s most valuable companies, Nestle SA and Roche Holding AG, rose to a record high this week and is up 19% this year, outperforming the Euro Stoxx 50 Index.
The SNB has been using negative rates plus a pledge to intervene in currency markets since early 2015 to stem appreciation pressure on the franc.
Schiltknecht, who was chief economist at the SNB in the 1980s before a career in commercial banking, has long opposed negative central bank rates, arguing that they create asset price bubbles and that the resulting excess liquidity isn’t feeding through to price or wage growth.
“Inflation defined as a broad increase in prices is dead in industrialized nations,” Schiltknecht said. “Those who haven’t noticed that include central banks and many economists. They unwaveringly keep building models in which inflation, inflation expectations, and real interest rates take center stage.”
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