Stressed are the cheesemakers - Switzerland’s, at least. As the European Central Bank (ECB) lowered interest rates to 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, the euro is rising and the 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 - 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 (SNB) 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. Gross domestic product rose 1.7% 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 says: “It is utterly remarkable that GDP is growing as strong as anywhere in Europe, unemployment is low, and yet we still have negative rates.”
“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 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 SNB tried to cap the franc to limit its value against the euro but gave up early in 2015. The franc soared even though the bank slashed its main policy interest rate to minus 0.75%.
The biggest distortions 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.
Inflation has picked up in Sweden and in Switzerland, where it has been negative for much of the past two years, and markets are anticipating rises in policy rates across the continent.
Even though 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. The bank’s deputy governor expects quantitative easing to continue into next year. And Stefan Ingves, the Riksbank governor, said that inflation needed to be at or close to its 2% target for longer to justify a rate increase.
Switzerland, meanwhile, will want to maintain the differential with eurozone interest rates - so will almost certainly not act 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.
Copyright The Financial Times Limited 2017