The Swiss National Bank (SNB) may decide on an extended easing cycle due to an unexpected slowdown in inflation in Switzerland and the strength of the Swiss franc, according to a report by Gavekal Research.

Inflation in Switzerland fell to 1.1% year-on-year in August, down from 1.3% in July and below the expected 1.2%. Developments suggest that inflation in the third quarter will be well below the 1.5% forecast by the SNB.

The SNB had previously allowed the franc to appreciate to combat imported inflation during the global inflation surge in 2022-2023.

But with inflation falling below the SNB’s target and the global inflation trend slowing, concerns are growing that the strategy could hurt exporters and push the economy towards a deflationary cycle.

The nominal effective exchange rate of the Swiss franc fell by 6% from January to May, but this trend has reversed over the past three months and all losses have been erased.

As a result, the franc’s real effective exchange rate has reached a cyclical peak, indicating a loss of international competitiveness.

The influence of the sturdy Swiss franc is observable in the inflationary impact of domestic and imported goods.

The share of domestic goods remained stable at around 1.5 percentage points, while the share of imported goods had been negative for more than a year and reached a up-to-date cyclical peak of -0.4 percentage points in August.

Swiss exporters are feeling the pressure of the franc’s strength. The country’s largest manufacturing lobby group has called on the SNB to provide assistance as members struggle to compete in foreign markets.

In this regard, the SNB has already cut the interest rate twice: from 1.75% to 1.25%, and further cuts below 1% are expected.

The SNB may also escalate its purchases of foreign currencies to counteract the appreciation of the franc. Although it only became a net buyer of foreign currencies in the first quarter of 2024, with purchases of CHF 800 million, there is potential for a significant escalate in activity given the historical quarterly average of CHF 13 billion of purchases between 2011 and 2021.

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