Street leading to the clock tower in Bern, Switzerland.
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Switzerland may be in Policymakers are struggling to rein in price growth as the Swiss franc strengthens and could slip into deflation next year.
The Swiss National Bank cut interest rates for the third time in September, saying the strengthening of safe-haven currencies was the main driver of falling inflation in Switzerland and falling oil and electricity prices.
The central bank also lowered its forecast, lowering the average annual inflation rate in 2024 from 1.3% to 1.2%. It also expects price growth to grow by 0.6% in 2025, compared with the previous forecast of 1.1%.
Outgoing SNB President Thomas Jordan said at the time that the strong Swiss franc had a “substantial impact” on the revision, but downplayed the risk of deflation, noting that The forecast remains “within the range of price stability.” He added that policymakers remain prepared to further adjust monetary policy to control inflation.
But analysts say it now looks increasingly likely that the central bank will have to rely on foreign exchange intervention to prevent the country from slipping into a deflationary environment.
Our forecast is for inflation to fall to 0.1%…it won’t take much to get it below zero
Adrian Preetjohn
European Economist at Capital Economics
Adrian Prettejohn, European economist at Capital, said, “There is still some room for further interest rate cuts, but considering that the appreciation of the Swiss franc may push Switzerland into a deflation zone, the Swiss National Bank directly intervenes through foreign exchange. Targeting Swiss currency valuations makes sense.
Foreign exchange (FX) intervention occurs when banks buy and sell their currency in the foreign exchange market to increase or decrease its value relative to another currency. Such measures can reduce price distortions and thereby influence inflation, especially in trade-intensive economies.
“We do not rule out the possibility of intervening in FX markets during periods of sharp appreciation pressure on exchange rates,” Julius Baer economist Sophie Altermatt told CNBC via email.
Switzerland’s case for low inflation
The Swiss franc has rallied in recent months and is now hovering near all-time highs as investors pile into the safe-haven asset amid market volatility and unwinding of positions against the U.S. dollar. Japanese yen carry trade.
As of Wednesday, EUR/CHF was trading around 0.9414 and USD/CHF was trading at 0.8669.
At the same time, Swiss inflation continues to fall.
Switzerland was Outliers among major economies Amid a double-digit inflationary spiral in recent years, price increases in the small European country reached a 29-year high of 3.5% in August 2022. first major western central bank Lower interest rates.
Inflation falls further Septemberwith an annual growth rate of 0.8%, compared with 1.1% in 2017 August.
Capital Economics said in a report last week that inflation in Switzerland is expected to fall to 0.3% by 2025, down from a previous forecast of 0.8%, due to a stronger Swiss franc and falling oil and housing costs. Preetjohn noted on Monday that the number could turn negative in some months.
“Our forecast is that inflation will fall to 0.1% in some months, so it won’t take much to get inflation below zero,” he said, describing deflation as “a real possibility.” sex” .
Risks to safe-haven currencies
Swiss National Bank President Jordan told CNBC last month that monetary intervention could be used along with interest rates to control prices “if necessary,” but did not commit to a specific timetable.
The bank is now expected to keep rates on hold at its next meeting in December before cutting them by another 25 basis points, taking the final rate to 0.75% in the first quarter of 2025, according to a Reuters poll of economists.
Maxime Botteron, economist and chief investment officer at UBS Global Wealth Management, said the bank may then turn to monetary intervention.
“Once the policy rate tools are exhausted, if more easing is needed, you would typically see the SNB intervene in FX markets,” Bertron told CNBC’s “Squawk Box Europe” last month.
“We believe that as the SNB’s policy rate approaches its effective lower bound, FX intervention may become a more appropriate policy tool,” BNP Paribas added in a note last month.
However, Botteron said the appreciation of the Swiss franc itself has not yet caused concern, with the safe-haven currency still appreciating at a pace well below its peaks in 2011 and 2015.
“We shouldn’t worry about the Swiss franc being overvalued,” Botteron said.
“We think there are some downside risks to inflation next year,” he continued. He added: “But as long as we don’t have significant appreciation, I think the risk of deflation requiring more aggressive easing of monetary policy … is unlikely to materialize at this stage.”
The Swiss National Bank will hold a meeting on December 12 to provide the latest monetary policy decision.
