The Swiss National Bank (SNB) is currently facing a challenging situation due to the unexpected slowdown in Switzerland’s inflation and the strength of the Swiss franc. The recent decline in inflation to 1.1% year-on-year in August, below both the previous month’s figure and the anticipated level, indicates a concerning trend. This decrease suggests that third-quarter inflation will fall significantly short of the SNB’s projection of 1.5%. This poses a significant challenge for the SNB, as it may need to implement further monetary easing measures to stimulate inflation and spur economic growth.
The strength of the Swiss franc is exacerbating the situation, as indicated by the currency’s nominal effective exchange rate, which has recently reversed a downward trend. The franc’s real effective exchange rate has reached a cyclical peak, signaling a loss of international competitiveness. This trend is particularly worrisome for Swiss exporters, who are struggling to remain competitive in foreign markets due to the strong franc. The negative inflationary contribution from imported goods highlights the challenges faced by Swiss businesses operating in a global market.
The SNB has already taken steps to address the situation, including two rate cuts that have brought the policy rate down to 1.25%. Further cuts below 1% are expected in the near future to provide additional stimulus to the economy. Additionally, the SNB may ramp up its foreign exchange purchases to counteract the appreciation of the franc. While the SNB only recently became a net buyer of foreign currency, there is potential for a significant increase in activity based on historical data.
Swiss exporters, in particular, are feeling the pressure from the franc’s strength, with the country’s largest manufacturing lobby group calling on the SNB for relief. The challenges faced by exporters highlight the need for a coordinated policy response to support Swiss businesses and ensure their continued competitiveness in global markets.
The SNB is facing a complex economic environment characterized by low inflation and a strong currency. The central bank’s response to these challenges will be crucial in determining the future trajectory of the Swiss economy. Implementing effective monetary policies to stimulate inflation and support export-led growth will be key priorities for the SNB in the coming months.