Swiss franc strength could prompt SNB to ease monetary policy by Investing.com

The Swiss National Bank (SNB) may engage in a prolonged cycle of monetary easing due to an unexpected slowdown in Swiss inflation and the strength of the 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 expectations of 1.2%. This development suggests that third-quarter inflation will be significantly lower than the NBS’s estimate of 1.5%.

The SNB previously allowed the franc to appreciate to combat imported inflation during the rise in global inflation from 2022-2023.

However, with inflation now below the SNB’s target and the global inflation trend receding, there is growing concern that this strategy could hurt exporters and push the economy into a deflationary cycle.

From January to May, the nominal effective exchange rate of the Swiss franc fell by 6%, but this trend has reversed in the last three months, with all losses reversed.

As a result, the real effective exchange rate of the franc reached a cyclical peak, indicating a loss of international competitiveness.

The strong impact of the 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 has been negative for over a year, reaching a new cyclical high of -0.4 percentage points in August.

Swiss exporters are feeling the pressure of the franc’s strength. The country’s largest manufacturing lobby group has called on the SNB to provide help as members struggle to compete in foreign markets.

As a result, the SNB has already cut the policy rate twice, from 1.75% to 1.25%, and further reductions below 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 buyer of foreign exchange in the first quarter of 2024, with purchases of CHF 800 million, there is the potential for a significant increase in activity, given the historical quarterly average of CHF 13 billion in purchases between 2011 and 2021.

This article was generated with support from AI and reviewed by an editor. For more information, see T&C.