Switzerland is currently facing unexpected challenges in terms of inflation and the strength of the Swiss franc. The latest report by Gavekal Research highlights a slowdown in inflation, with the rate dropping to 1.1% year-on-year in August. This is below the SNB’s anticipated 1.2% and suggests that third-quarter inflation figures will fall short of expectations. The appreciation of the Swiss franc, which was initially intended to combat imported inflation, has now become a concern as it could potentially lead to a deflationary cycle in the economy.
The strength of the Swiss franc is reflected in both domestic and imported goods. While the contribution from domestic goods remains stable at around 1.5 percentage points, the contribution from imported goods has been negative for over a year. In August, this negative contribution reached a new peak of -0.4 percentage points. Swiss exporters are particularly feeling the pressure from the strong franc, as it hampers their competitiveness in foreign markets. The country’s largest manufacturing lobby group has urged the SNB to take action to alleviate this situation.
SNB’s Response
In response to these challenges, the SNB has already made some policy adjustments. The central bank has reduced the policy rate twice, bringing it down from 1.75% to 1.25%. Further cuts are expected, with rates potentially going below 1%. Additionally, the SNB may increase its foreign exchange purchases to counteract the appreciation of the franc. While the bank only became a net buyer of foreign currency in the first quarter of 2024, there is room for a significant increase in activity based on historical data.
Looking ahead, it is crucial for the SNB to carefully navigate these challenges to prevent the economy from entering a deflationary cycle. By engaging in a prolonged monetary easing cycle, the central bank aims to stimulate economic growth and address the issues stemming from the strong Swiss franc and low inflation. The decisions made by the SNB in the coming months will be instrumental in determining the country’s economic trajectory in the near future. It remains to be seen how effective these policy measures will be in stabilizing the economy and supporting Swiss exporters amidst global economic uncertainties.