The Swiss National Bank may engage in a prolonged monetary easing cycle due to an unexpected slowdown in inflation in Switzerland and a strong Swiss franc, according to a report by Gavekal Research.
Inflation in Switzerland fell to 1.1% year-on-year in August, down from 1.3% in July and below the 1.2% forecast. This development suggests that inflation in the third quarter will be well below the 1.5% forecast by the Swiss National Bank.
The Swiss National Bank had previously allowed the franc to appreciate to combat imported inflation during the global inflation wave in 2022 and 2023.
However, with inflation now below the SNB’s target and global inflation moderating, concerns are growing that this strategy could hurt exporters and push the economy into a deflationary cycle.
From January to May, the Swiss franc’s nominal effective exchange rate fell by 6%, but this trend has reversed over the past three months, with all losses being erased.
As a result, the real effective exchange rate of the franc reached a cyclical peak, indicating a loss of international competitiveness.
The impact of the strong Swiss franc is evident in the inflationary contribution of domestic and imported goods.
The contribution of domestic goods remained stable at around 1.5 percentage points, while the contribution of imported goods remained negative for more than a year, reaching a new cyclical high of -0.4 percentage points in August.
Swiss exporters are feeling the squeeze from the strong franc. The country’s biggest manufacturing lobby has called on the Swiss National Bank to ease the pressure, as member states struggle to compete in foreign markets.
As a result, the Swiss National Bank has already cut interest rates twice, from 1.75% to 1.25%, and further cuts of less than 1% are expected.
The SNB may also increase its foreign exchange purchases to counter the appreciation of the franc. Although it only became a net foreign exchange buyer in the first quarter of 2024, with purchases of CHF 800 million, there is potential for a significant increase in activity given the historical quarterly average of CHF 13 billion in purchases between 2011 and 2021.
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