One word completely dominates the discourse of economists and central banks: inflation. Countries around the world have engaged in an all-out battle against rising prices with historic rate hikes from the Fed and ECB. However, a country in the heart of Europe can become the perfect example You have to be careful what you wish for. After declaring total victory over inflation, Switzerland now foresees a major risk, even more dangerous for the economy: deflation.
As the Federal Reserve explains in one of its reports, deflation means a more powerful threat to growth because “it creates incentives to save and postpone spending because prices will be lower and purchasing power higher in the future. This trend depresses spending and weakens the economy.” This is the danger that seems more and more real since Berne.
The alarm went off with the latest CPI data for September and the discourse became even more heated with the data published this Friday. If the ninth month of the year inflation fell to 0.8%, its lowest level since 2020 and 2021, When the feared deflation occurred in October, the figure rose by only 0.6%.
Swiss inflation slowed unexpectedly, strengthening the case for further rate cuts from the Swiss National Bank and fueling fears that price growth could fall short of the central bank’s target. Precisely, the central bank has already reduced interest rates three times this year, by movements of 25 basis points, the last time in September and from February. Today, the price of silver in Switzerland is 1%.
The concern is such that the Swiss National Bank (SNB) itself admits that it is even prepared to continue towards negative interest rates following the inflation figures. “We cannot rule out negative rates “For the moment we are not excluding anything,” new President Martin Schlegel said this month. That same Tuesday, Schlegel said that, in any case, “a further rate cut would be absolutely necessary to maintain price stability.”
Swiss inflation has not accelerated since April in a context of continued appreciation of the franc. By making imports cheaper, the exchange rate has a considerable impact on price pressures.
From Pantheon Research they comment that “unless a significant and sustained increase in prices of oil to boost inflation in the new year enough to offset the drop in electricity prices in January, we expect inflation to be around 0.5% at the start of the new year.
Inflation…too low
For the whole year, consumer prices will grow at an annual rate of 1.2% in 2024 and 0.7% the following year, as announced on Thursday by the Secretary of State for the Economy. This figure is lower than previous forecasts of 1.4% and 1.1% respectively and contrasts with the Swiss National Bank’s forecasts of 1.3% and 1.1%, which have not yet been updated.
However, the company emphasizes that today, when inflation is already hovering around these levels, the SNB will have to act quickly if it does not want to avoid negative prices. “The Bank will need to be even more flexible, like the ECB, to avoid a significant appreciation of the franc and avoid the risk of deflation, and expectations for official ECB interest rates have fallen even more recently “, they comment. Pantheon. The SNB made it clear last week that was dissatisfied with the recent strength of the currency and therefore “could cut more than expected, to continue to offset this upward pressure. But there is a floor. We doubt that the SNB will bring rates below zero when ECB rates remain positive.”
Everyone agrees that the franc will be the key since its strength was one of the great keys to explaining theThe Alpine country’s resistance to inflation. From BNP Paribas they defended that the currency, which serves as a refuge in times of geopolitical chaos, “represents an unbreakable shield against the CPI since it is responsible for the substantial control of import prices.”
The Swiss franc (purchased with a basket of various currencies) revalued by 2.39% so far this year. All this despite the fact that it fell 5.93% from its April highs, before beginning its rate cut policy. Compared to the euro, it fell by 1.14% over the year and by 2.68% against the dollar. However, in all cases it has shown a clear rebound since February, when it had already surged during the year. The country’s central bank and businesses are under strain trying to make the currency fall even further, because they know that a revival of the currency could go completely against the needs of the economy right now.
From Gavekal Research, they explain that this is their big weapon that could end up harming them. “During the post-pandemic global inflation surge of 2022-23, the ever-vigilant SNB encouraged an appreciation of the Swiss franc to stop imported inflation. It succeeded in this effort, which placed it in a different situation from that of other Western European economies. » Analysts emphasize, however, that “Swiss inflation is now completely under control and the big risk is that the evolution of the franc will seriously harm exports (by increasing prices too much) and lead the economy into a deflationary cycle.
From Capital Economics, they accepted even though they had an even more negative outlook, “Since the last SNB monetary policy meeting in September, we have revised our inflation forecast downward and now expect it to fall from 1.1% in 2024 to just 0.3% in 2025.” In this sense, “if oil prices fall or if the franc appreciates, this could push inflation to its limits”. The company clearly knows how close this scenario is. “A simple 5% increase in the franc would be enough to push the country towards deflation. Even if it is a significant increase, the franc has increased by 3% on average every year for 15 years, this would not be a total surprise.”
“The threat of deflation will likely cause the SNB to exercise caution in the coming months and invest in the currency market.”
Not so long ago, it seemed that the Swiss franc was entering a quiet retreat, with a drop of 6% in the first half. However, this summer, as the Fed and ECB began cutting rates, the currency soared and the entire process reversed itself, undoing what seemed like a perfect transaction. “As global disinflation takes hold, the inflation gap with Switzerland’s Western trading partners has narrowed to its historical average of 1 to 1.5 percentage points. Consequently, the recent nominal appreciation of the franc has caused its real effective exchange rate to reach a cyclical peak. ” they say of Gavekal.
The firm’s economists say the contribution of imported goods subtracted four-tenths from the CPI in the August data with recent declines. Something that clearly shows the importance of currency. “The Alpine nation is now ready to import deflation. “Furthermore, this strength puts pressure on the manufacturing sector which has already asked the SNB to take measures such as massive foreign exchange purchases.”
In any case, Capital Economics believes that even if deflation eventually makes its way, This will not become a systematic and structural trend as has happened over the past decade. “The threat of deflation will likely cause the SNB to err on the side of caution in the coming months,” comments the bank. In this sense, they rely on aggressive purchases of currencies to keep prices low. » In any case, the great danger has completely changed and it remains to be seen whether the SNB is capable of short-circuiting the franc bomb that will be launched. the main threat to Switzerland in 2025.
