Nevertheless, it always comes as a shock when central bankers cock it up. And cock up is certainly the phrase for Thursday’s antics in Bern when the Swiss Central Bank lost control of the exchange rate, letting the Swiss franc soar by 30 per cent in an afternoon.
The trigger was our new enemy: rampant global deflation, intensified by crashing oil and copper prices. With Germany insanely budgeting for a fiscal surplus, the debt-ridden eurozone countries face secular stagnation. Which means that putting your cash in safe-haven Swiss banks looks a good idea. For the past three years the Swiss Central Bank has striven to peg the franc to the euro, to stop Swiss exporters being priced out of business by a rising exchange rate. Unfortunately, as the euro has plummeted, it means that Swiss manufacturers are having to slash costs to stay competitive, squeezing economic growth.
Something had to give, and give it did on Thursday, when the Swiss Central Bank gave up the unequal fight and abandoned the currency peg with the euro. But there are no free lunches in global capitalism. The surging Swiss franc could precipitate a deep recession. Result: Swiss stock had its biggest one-day crash in a quarter of a century. Welcome to the deflation club, Bern.
Draghi’s move will leave consumers cold
WHAT triggered the Swiss debacle was the expectation that next week the European Central Bank will press ahead with its plan to print billions of euros and begin a giant government bond-buying spree – despite the opposition of the Bundesbank and the German courts. Call this a north-south conflict between Berlin and the Club Mediterranean eurozone members. However, the real question is not whether ECB boss Mario Draghi will defy Berlin, but how big a bond-buying spree he will risk? The markets are expecting something in the €500 billion (£382m) to €600bn range. Anything less will be laughed off as too little. Even then, I agree with an RBS analysis, which thinks this level of European quantitative easing may perk up financial markets but do nothing to reverse weak consumer demand.
Carney’s confidence may be misplaced
While other central bankers were losing their head, Mark Carney at the Bank of England spent the week breathing optimism. The collapse in oil prices might be bad for Aberdeen, but Mr Carney thinks it will be a “net positive” for the UK.
As I’ve noted before, when cash-strapped oil producing states start liquidating their asset holdings in London, the prospect for UK funds might be less than rosy. Nor is the UK immune from the deflation virus: retail food prices in December were down 1.9 per cent on 2013.
Practically every month in the four years from the credit crunch to September 2012, UK consumers paid off more unsecured debt than they borrowed. Since then the trend has reversed with almost every month seeing increased borrowing. That is what has driven Britain’s return to growth. But deflation increases the real debt burden making consumers reluctant to borrow. Which suggests Mr Carney’s optimism is misplaced.
SUBSCRIBE TO THE SCOTSMAN’S BUSINESS BRIEFING