The Swiss National Bank (SNB) has officially entered a new era of zero interest rates, cutting its benchmark interest rate by 25 basis points to 0%. As of today, Switzerland is experiencing deflation. That’s because consumer prices fell at a 0.1% annual rate in May. To counteract the increase of inflationary pressure, the SNB is promoting monetary policy easing measures to create economic stability.
Being a small, open economy, Switzerland’s inflation dynamics are highly affected by its import intensity. The high degree to which the country depends on imports contributes a considerable share of the country’s Consumer Price Index (CPI) inflation. The inflationary impact of the recent strength of the Swiss franc is bringing the inflation rate down. It does this by methodically undercutting the cost of foreign imports. Analysts from Caixabank expect the Swiss franc to keep climbing, adding to tricky inflationary dynamics.
Financial markets had by and large expected the SNB to cut interest rates. Just a couple of days ago, they had priced in an 81% chance for a quarter-point cut and a 19% chance for a larger 50-basis-point reduction. Adrian Prettejohn, the Europe economist at Capital Economics, considers these first steps. His forecast sees rates back at -0.25% before the year-end.
“There are risks that the SNB will go further in the future if inflationary pressures don’t start to increase, and the lowest the policy rate could go is -0.75%, the rate it reached in the 2010s.” – Adrian Prettejohn
Realistically, the SNB recognizes the growing economic headwinds and seeks to offset the reduction in inflationary pressure via the recent monetary policy changes. In a statement, the bank noted, “Inflationary pressure has decreased compared to the previous quarter. With today’s easing of monetary policy, the SNB is countering the lower inflationary pressure.”
Even as the strength of the Swiss franc poses ongoing challenges for the SNB, it has some difficult work ahead to get inflation down to more stable, predictable levels. Charlotte de Montpellier highlighted this phenomenon, stating, “As a safe-haven currency, the Swiss franc tends to appreciate when there is stress on world markets.” She further emphasized that “this systematically pushes down the price of imported products,” reinforcing Switzerland’s vulnerability to global market shifts.
Both to address these challenges, and in anticipation of the continuing high levels of inflation, the SNB will tighten its monetary policy accordingly. According to their statement, “The SNB will continue to monitor the situation closely and adjust its monetary policy if necessary, to ensure that inflation remains within the range consistent with price stability over the medium term.”