Why is the Swiss franc appreciating so much?

A strong franc brings the advantage of making foreign goods and services cheaper for Swiss consumers. © Keystone / Gian Ehrenzeller

The Swiss franc is stronger against the euro than ever before. What does this mean for the export industry and for inflation? And what role does the Swiss National Bank (SNB) play?

Autumn holidays in Italy or France this year were cheaper than ever for the Swiss: they only had to pay CHF0.94 for €1. Twenty years ago, €1 cost CHF1.55. What happened?

How has the Swiss franc exchange rate developed in recent years?

Over the past couple of decades the Swiss franc has appreciated against all the world’s major currencies. It has not only appreciated significantly against the euro in the past 20 years or so, but also against the United States dollar and the British pound.

Appreciation against the pound has been the most pronounced: whereas £1 cost around CHF2.50 in 2008, today it costs only around CHF1.10.

Why is the Swiss franc appreciating against other currencies?

In the long run, a simple rule applies: the lower the inflation rate in a country, the more its currency appreciates. This is because internationally traded goods must be roughly the same price in every currency, according to the theory of Purchasing Power Parity.

For example, if the price of a camera rises by 2% a year in Germany but only by 1% in Switzerland, this means that cameras in Switzerland become comparatively cheap. As a result, more people from Germany would order a camera in Switzerland. And because they must pay for them in Swiss francs, demand for francs increases. The franc becomes more expensive; it appreciates.

Therefore, over time, the appreciation of the Swiss franc equalises price changes between currency zones. However, there are also phases in which the franc appreciates excessively.

What happens to exports if the Swiss franc appreciates excessively?

If the Swiss franc appreciates excessively, Swiss exports become more expensive abroad. An excessive appreciation of the Swiss franc is therefore detrimental to tourism, for example, because fewer foreign visitors will come to Switzerland. The machinery, electrical and metal industries also suffer if their products become more expensive abroad.

How does Swiss franc appreciation affect inflation?

A strong franc brings the advantage of making foreign goods and services cheaper for Swiss consumers. This is particularly important for oil and natural gas. These goods are largely traded in US dollars and euros.

Sharp price increases on the international oil or natural gas market – such as in 2022 – are therefore not fully reflected in Swiss prices if the US dollar or the euro have more favourable exchange rates. This reduces domestic inflation.

What role does the Swiss National Bank play?

The SNB influences the value of the Swiss franc in two ways. First, it tries to achieve a lower average inflation rate than other countries. This leads to an appreciation of the Swiss franc in the long term.

Second, the SNB can influence the value of the Swiss franc in the short term with its monetary policy. Most recently, it sold foreign currency to make the franc appreciate. This has made imports cheaper – and thus kept Swiss inflation comparatively low.

Author Fabio Canetg completed his doctorate in monetary policy at the University of Bern and the Toulouse School of Economics. He currently teaches on the economics Master’s programme at the University of Neuchâtel and is also a MAS lecturer at the University of Bern. As a journalist, he works mainly for Swiss radio and television and swissinfo.ch. He hosts the monetary policy podcast “Geldcast” and the financial podcast “Börsenstrasse Fünfzehn”