Switzerland’s Economic Outlook: Navigating Deflationary Risks
As the Swiss National Bank (SNB) continues to grapple with the country’s declining inflation rate, concerns are growing that Switzerland may slip into deflationary territory next year. The strong Swiss franc, coupled with lower oil and electricity prices, has led to a downward revision of the central bank’s inflation forecasts.
Monetary Policy Challenges
The SNB has already cut interest rates three times this year, but analysts believe that further rate cuts may not be enough to combat the deflationary risks. With the franc appreciating rapidly, foreign currency intervention may become a necessary tool to prevent the country from slipping into deflation.
Currency Interventions: A Possible Solution
Foreign exchange (FX) interventions involve buying or selling a currency to raise or lower its value against another currency. This can help reduce price distortions and impact inflation, particularly in trade-heavy economies like Switzerland. Economists believe that the SNB may need to intervene in the FX markets to directly target the currency’s valuation and prevent deflation.
Inflation Forecasts: A Gloomy Outlook
Capital Economics has revised down its inflation forecast for Switzerland, predicting a rate of 0.3% in 2025, down from its previous estimate of 0.8%. With the franc’s strength and lower oil and housing costs, inflation could potentially turn negative in certain months.
Deflation: A Real Possibility
According to Adrian Prettejohn, Europe economist at Capital Economics, deflation is a real possibility, with inflation potentially falling as low as 0.1% in some months. Outgoing SNB chairman Thomas Jordan has signaled that currency intervention could be used alongside interest rates to combat deflation, but did not commit to a timeline.
Next Steps for the SNB
The SNB is expected to hold rates steady at its next meeting in December, before cutting by 25 basis points to take the terminal rate to 0.75% in the first quarter of 2025. However, economists believe that the bank may need to turn to currency intervention if further easing is needed.
A Delicate Balance
While the appreciation of the Swiss franc is not yet a cause for concern, economists warn that a sharp appreciation could push Switzerland into deflation territory. The SNB must navigate a delicate balance between supporting the economy and preventing deflation.
What’s Next?
The SNB will meet on December 12 to provide its latest monetary policy decision. As the country’s economic outlook remains uncertain, all eyes will be on the central bank to see how it chooses to address the deflationary risks facing Switzerland.
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