SNB Prepares for Extended Monetary Easing Due to Cooling Inflation

The Swiss National Bank (SNB) may extend its monetary easing cycle due to a surprising slowdown in Switzerland’s inflation and the ongoing strength of the Swiss franc, according to a report by Gavekal Research.

In August 2024, Switzerland’s inflation rate dropped to 1.1% year-on-year, down from 1.3% in July, and below the expected 1.2%. This decline indicates that third-quarter inflation will fall well below the SNB’s forecast of 1.5%.

Previously, the SNB allowed the Swiss franc to appreciate to counter imported inflation during the global surge in inflation from 2022-2023. However, with inflation now below target and global inflation easing, there are concerns that this strategy may negatively impact Swiss exporters and lead the economy toward a deflationary cycle.

Between January and May 2024, the Swiss franc’s nominal effective exchange rate fell by 6%. However, in the past three months, the franc has regained these losses, with its real effective exchange rate hitting a cyclical peak, reflecting a loss of international competitiveness.

The strong franc is putting pressure on Swiss exporters. The country’s largest manufacturing lobby has urged the SNB for relief, as businesses face challenges in foreign markets. In response, the SNB has already reduced its policy rate twice, from 1.75% to 1.25%, with further cuts below 1% anticipated.

To combat the franc’s appreciation, the SNB may increase foreign exchange purchases. The central bank became a net buyer of foreign currency in early 2024, purchasing CHF800 million in the first quarter. Historically, the SNB averaged CHF13 billion in quarterly foreign exchange purchases between 2011 and 2021, suggesting room for further interventions.

This monetary policy shift highlights the delicate balance the SNB faces between maintaining inflation targets and supporting Swiss exporters.