Pressure is mounting on the Swiss National Bank (SNB) to deliver a big, bold move. This response is necessary in light of unprecedented conditions in the exchange market and worrisome domestic economic data. Just last week, the USD/CHF exchange rate dropped to 0.8050, the lowest level since January 2015, and not four consecutive weeks in July and August of 2011. Moreover, the EUR/CHF has been trading at or near all-time lows, most recently just above 0.9250.
Until recently, the SNB has seemed to be very much involved in verbal or in physical interventions to move the EUR/CHF rate. As the financial environment deteriorates, it can ill-afford not to turn to tougher measures, particularly more active currency interventions. Many analysts believe that the SNB will pre-emptively announce plans to cut rates considerably. This bold move is intended to jump-start the economy in a targeted, smart way.
Data for the most recent month shows that alarming trends continue in Switzerland’s producer and import price index. In May, this index was down 0.5%, which was considerably lower than the consensus expected a small increase of 0.1%. This drop puts the index at its lowest point since February 2022. It also underscores a more troubling development — that the index has remained negative for 25 straight months. On a year-on-year basis, the decline accelerated to 0.7% from 0.5%, showing the steepest decline seen over the last half year.
What these economic indicators mean is even more important. We know already that Switzerland’s consumer price index has fallen into negative territory for the first time in more than four years. This change has triggered fears over possible deflationary forces in the economy. As these trends unfold, market participants anticipate a 25-basis-point cut to the SNB’s key rate at its upcoming quarterly meeting. In addition, a second 25-basis-point cut is forecast before the end of the year.
The SNB is almost certain to have to move decisively at its next meeting in light of increasing domestic and international economic pressures. The impending producer and import price index collapse alongside a diminishing consumer price index is a clarion call. We recognize that immediate action is required to avoid deepening the downward economic spiral.