The Swiss National Bank (SNB) may consider a more prolonged period of monetary easing due to a sharper-than-expected drop in inflation and the continued strength of the Swiss franc, according to a report by Gavekal Research.
Switzerland’s inflation rate declined to 1.1% year-on-year in August, down from 1.3% in July, falling below the expected 1.2%. This signals that inflation for the third quarter will likely fall short of the SNB’s forecast of 1.5%.
In response to global inflation surges during 2022-23, the SNB had allowed the franc to appreciate to curb imported inflation. However, with inflation now below target and global inflationary pressures easing, concerns are mounting that the franc’s strength may negatively impact exporters and potentially lead to deflation.
Earlier this year, between January and May, the nominal effective exchange rate of the franc declined by 6%, but this decline was completely reversed over the past few months. The real effective exchange rate has now reached a cyclical high, eroding Switzerland’s international competitiveness.
The effects of the franc’s strength are clearly visible. While inflation from domestic goods has remained steady at 1.5 percentage points, imported goods have shown negative inflation contributions for over a year, reaching -0.4 percentage points in August.
Swiss exporters are feeling the strain, with the country’s largest manufacturing lobby urging the SNB to provide relief, as many companies struggle to remain competitive in international markets.
To address these challenges, the SNB has already reduced its policy rate twice, lowering it from 1.75% to 1.25%, with additional cuts below 1% expected. There is also speculation that the SNB may ramp up its foreign currency purchases to curb the franc’s appreciation. The bank became a net buyer of foreign currency in early 2024, acquiring CHF800 million in the first quarter, though its historical average between 2011 and 2021 was CHF13 billion per quarter.
These moves suggest that the SNB is preparing for a more active approach to safeguard Switzerland’s economic stability amid the franc’s continued strength.
