In September year-on year, the consumer prices in Switzerland decreased with 0.2%. This dramatic drop helps bolster the small country’s historic reputation for maintaining low inflation, especially in contrast to its troubled European neighbors. This drop in consumer prices is occurring as part of a long-term trend of franc appreciation. It does point to just how strong the Swiss currency is in today’s economic landscape.
Mountainous Switzerland, meanwhile has consistently recorded the lowest inflation rates across the continent, along with a few other exception European nations. This trend has held true year after year. Annual price growth in the country has dropped to 0.2%. This is the third month now that this key figure has held steady. This year’s predicted annual growth rate is 0.1 percentage point below the 0.3% average forecast. Though still low, inflation again comes in more than a tick below market expectations.
The correct interpretation is that the Swiss National Bank (SNB) is *not* passively intervening in currency markets. Perhaps, they are taking preemptive measures about the possible harmful effect of a strong franc on their economic recovery. Running up to this meeting, the SNB implemented some of its largest ever currency interventions over several years, with the goal of weakening the franc. These actions reflect a clear bias towards situational mitigations. The country’s central bank, the Bank of Japan, decided to maintain its current policy of zero rates rather than introduce a negative rate.
Switzerland’s foreign trade surplus is a key pillar keeping downward pressure on the franc over the long run. With the help of these capital inflows, the country’s currency receives a strong positive contribution to its value. The SNB’s approach suggests a strategy to establish a floor for the franc’s value, reminiscent of interventions conducted between 2012 and 2014.
Even with the headwinds of a strong currency, the Swiss economic model is fundamentally sound. The development of the persistent foreign trade surplus and capital inflows is telling us that in fact the franc is strong. Underlying these conditions is a sound economic foundation. The SNB is currently implementing a targeted approach to address dynamic currency stresses. This painstaking, sensible approach prioritizes their commitment to maintaining long-term economic vitality.