Rising Rates Sink Swiss National Bank in $3.6 Billion Loss

ZURICH — The Swiss National Bank announced on Monday that it suffered a staggering loss of 3.2 billion Swiss francs ($3.6 billion) in 2023, marking the second consecutive year it has been unable to pay dividends. The sizeable deficit is a stark consequence of the central bank’s fight against inflation through higher interest rates.

The substantial loss sustained by the Swiss National Bank, known as the SNB, mirrors the challenges faced by other major central banks globally. As policymakers aggressively raised borrowing costs to combat surging prices, the institutions found themselves paying billions in interest to commercial lenders parking funds with them.

In Germany, the Bundesbank reported a €21.6 billion ($23.1 billion) loss last year, virtually wiping out all of its financial buffers. The Dutch central bank also recorded a €3.5 billion ($3.7 billion) deficit.

For the SNB, the mounting costs of its tighter monetary policy overshadowed the gains from its gold holdings and the interest earned on emergency loans extended during the rescue of the troubled Credit Suisse bank last year.

Thomas Jordan, the departing chairman of the SNB, acknowledged the challenges posed by higher interest rates. “While our policies have successfully reined in inflation more rapidly than many peers, the transition to positive rates has impacted our financial results,” he stated.

After years of negative interest rates, the SNB switched course in 2022, ultimately raising its benchmark rate to 1.75% by June 2023. This policy shift required the central bank to pay interest to commercial lenders holding deposits, incurring substantial expenses.

Karsten Junius, an economist at J.Safra Sarasin, a Swiss private bank, believes the losses are unlikely to spur political pressure on the SNB. “The success of its monetary policy is so obvious,” he said. “It has brought Swiss inflation back to its target range faster than all other major central banks, clearly fulfilling its mandate.”

Indeed, Switzerland’s inflation rate has moderated considerably, reaching 1.2% in February, its slowest pace in nearly two and a half years. This stands in stark contrast to the elevated inflation plaguing many of Switzerland’s neighbors.

The SNB’s financial woes were further compounded by the appreciation of the Swiss franc last year, a byproduct of higher interest rates and lower domestic inflation compared to other nations. A stronger currency eroded the value of the central bank’s extensive foreign bond and stock holdings, totaling nearly 700 billion francs.

While the SNB recorded a profit of 4 billion francs from its foreign currency positions, dividend payments, interest income, and valuation gains were offset by a staggering 58 billion franc loss tied to exchange rate fluctuations.

Despite the challenges, the SNB garnered a 1.7 billion franc valuation gain on its substantial gold reserves, which total 1,040 metric tons. Additionally, it generated 1.4 billion francs in profit from the emergency loans issued to facilitate the takeover of Credit Suisse during the banking crisis.

The 2023 deficit, while substantial, marked an improvement from the record 132.5 billion franc loss recorded in the previous year. However, the central bank’s depleted finances precluded the payment of dividends to shareholders or the Swiss government for the second consecutive year.

As the SNB prepares to announce its latest interest rate decision on March 21, economists anticipate that the recent losses will not sway policymakers from their inflation-fighting course.

“The SNB’s primary mandate is maintaining price stability,” said Junius. “While the losses are significant, they are unlikely to influence the central bank’s monetary policy decisions, which have proven effective in reining in inflation.”

The challenges confronting the SNB and its global counterparts underscore the delicate balancing act central banks face in normalizing monetary policy while mitigating the economic fallout from years of ultra-low interest rates.

As policymakers continue their battle against persistently high inflation, the financial burdens borne by central banks may persist, testing their resolve and independence in pursuing policies aimed at restoring price stability.

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