The Swiss National Bank (SNB) is facing a challenging situation due to the unexpected slowdown in Switzerland’s inflation and the strength of the Swiss franc. Recent data shows that inflation in Switzerland fell to 1.1% year-on-year in August, below the anticipated 1.2%, signaling that third-quarter inflation may be significantly lower than the SNB’s target of 1.5%. This poses a dilemma for the SNB, which had previously allowed the franc to appreciate to combat imported inflation during the global inflation surge of 2022-23.
With inflation now below the SNB’s target and the global inflationary trend on the decline, there are concerns that the current strategy may harm Swiss exporters and push the economy toward a deflationary cycle. The strength of the Swiss franc is putting pressure on exporters, making it difficult for them to compete in foreign markets. In fact, the country’s largest manufacturing lobby group has already called on the SNB to provide relief to its members.
In response to these challenges, the SNB has already reduced the policy rate twice, from 1.75% to 1.25%, and further cuts below 1% are expected. Additionally, the SNB may increase its foreign exchange purchases to counteract the franc’s appreciation. While the SNB only became a net buyer of foreign currency in the first quarter of 2024, with CHF800 million in purchases, there is potential for a significant ramp-up in activity.
The impact of a prolonged monetary easing cycle by the SNB could have far-reaching consequences for the Swiss economy. A continued depreciation of the Swiss franc could help boost exports and support economic growth. However, there is also a risk of inflationary pressures building up in the long run due to excessive monetary stimulus. Balancing these factors and managing the exchange rate effectively will be crucial for the SNB in the coming months.
Overall, the SNB’s decision to engage in a prolonged monetary easing cycle is a response to the challenging economic conditions in Switzerland. By closely monitoring inflation trends, exchange rates, and the overall economic environment, the SNB aims to support economic growth while maintaining price stability. The coming months will be critical in determining the success of these measures and their impact on the Swiss economy.