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How people admired them, the world‘s central banks, when they became fire departments in the major crises of recent years. In the financial crisis, for example, when they flooded the markets with liquidity and saved the economy from crashing. Or after the outbreak of Corona, when the economy suddenly came to a standstill and the central banks in many places almost became state ATMs.
Today the magicians of yesteryear are disenchanted, and maybe that’s not such a bad thing. The head of the Swedish central bank had to ask the Swedish parliament for a capital increase last week. The rapid and sharp rise in interest rates had caused steep losses for the bonds in the Riksbank’s portfolio.
The curse and blessing of the strong franc
The same mechanism contributed to the billion-dollar loss at the Swiss National Bank in the third quarter. The foreign bonds that the SNB has purchased in recent years are worth much less. When interest rates rise, bond prices fall.
The fact that the (successful) monetary policy of yesteryear is leading to problems in the here and now is also shown by the strong franc. It helps to keep import prices and thus the inflation rate low. However, it is a burden for export-oriented companies. At the same time, the SNB’s foreign currency investments are losing value because the franc has become stronger against most currencies.
Profit distributions as good as in the bucket
In the medium term, the SNB could even jeopardize its credibility, says economist Adriel Jost. The idea behind it: The SNB invests large parts of its foreign currency assets, which it acquired to control the exchange rate, in government debt of large currency areas, especially in US bonds. This means that it is, to a certain extent, drawn into the US debt maelstrom. Because, in Jost’s words, the USA is pursuing an irresponsible fiscal policy: it is taking on debt and having it financed by the central banks.
The whirlpool is a thing of the future, but the steep losses on the investments are not. Everything suggests that the federal government and cantons will not receive any money from the SNB this year either. Their profit is likely to be too low at the end of the year. This proves those voices who have long been advising the cantons not to expect fixed profit distributions from the central bank to be right.
Andreas Kohli
Business editor SRF
Open the people box. Close the people box
Andreas Kohli has been working for SRF since 2009. Before that, he wrote for the St. Galler Tagblatt, the Thurgauer Zeitung, the business newspaper Cash and the Tages-Anzeiger.