The world’s great battle is against inflation… but this European country faces a crisis as prices fall

One word completely dominates the discourse among economists and central bankers: inflation. Countries around the world have engaged in an all-out fight against rising prices through historic rate hikes by the Fed and the ECB. However, a country in the heart of Europe can be a great example of what You must be careful what you wish for. Having declared a complete victory over inflation, Switzerland now sees a big risk that is even more dangerous for the economy: deflation.

As the Federal Reserve explains in one of its reports, deflation means more powerful threat to growth because “this creates incentives to save and defer expenses because prices will be lower in the future and purchasing power will increase. This model reduces costs and weakens the economy.” This danger seems increasingly real after Bern.

Alarms were raised following the release of the latest CPI data for September, and data released this Friday has further intensified the debate. If in the ninth month of the year inflation fell to 0.8%, the lowest level since 2020 and 2021., When dangerous deflation did occur, the rate rose just 0.6% in October.

Swiss inflation unexpectedly slowed, strengthening the case for further rate cuts by the Swiss National Bank and fueling fears that price rises may miss the central bank’s target. More precisely, the central bank has already cut interest rates by 25 basis points three times this year, most recently in September this year and starting in February. Now the price of money in the Swiss country is 1%.

The concern is so great that the Swiss National Bank (SNB) itself admits that it is even prepared to continue moving towards negative interest rates following inflation figures. “We cannot rule out negative rates “We are not ruling anything out at the moment,” debutant President Martin Schlegel commented this month. Also on Tuesday, Schlegel noted that in any case, “further rate cuts will be absolutely necessary to maintain price stability.”

Swiss inflation has not accelerated since April amid the continued strengthening of the franc. By making imports cheaper, currency exchange rates have a significant impact on price pressures.

From Pantheon Research they note that “unless significant and sustained price increases oil to raise inflation in the new year enough to offset the upcoming drop in electricity prices in January, we suspect inflation will be around 0.5% at the start of the new year.

Inflation…too low

For the whole year, consumer prices will grow at an annual rate of 1.2% in 2024. and 0.7% next year, the State Secretary for Economic Affairs announced on Thursday. The figure is lower than previous forecasts of 1.4% and 1.1%, respectively, and contrasts with the Swiss National Bank’s forecasts of 1.3% and 1.1%, which have not yet been updated.

However, the firm stresses that with inflation already hovering around these levels, the SNB will have to act quickly if it is to avoid negative prices. “The bank will have to be even more flexible, as will the ECB, to avoid a significant appreciation of the franc and the risk of deflation, and expectations for the ECB’s official interest rates have fallen further recently,” Pantheon commented. . Last week the NSS made it clear that was dissatisfied with the recent increase in the exchange rate and therefore “may cut more than we expect to continue to offset this upward pressure. But there is a lower limit. We doubt that the SNB will lower rates below zero when ECB rates remain positive.”

Everyone agrees that the franc will be a key factor, since its strength was one of the most important keys to explainThe Alpine country’s resistance to inflation. BNP Paribas said the currency, which serves as a safe haven in times of geopolitical chaos, “represents an indestructible shield against the consumer price index, as it is responsible for a significant containment of import prices.”

Swiss franc (bought with a basket of different currencies) revalued by 2.39% so far this year. All this despite falling 5.93% from its April highs before he began the rate cut route. It fell 1.14% for the year against the euro and 2.68% against the dollar. However, in all cases it has shown a clear rebound since February, having previously jumped during the year. The country’s central bank and companies are on edge trying to force the currency to fall further because they know that waking up the currency could be completely contrary to the needs of the economy at the moment.

From Gavekal Research they explain that it is their great weapon that can ultimately harm them. “During the post-pandemic global inflation surge of 2022-2023, the ever-vigilant SNB encouraged appreciation of the Swiss franc stop imported inflation. This attempt was successful, which placed it in a different situation from other Western European countries.” However, analysts note that “Swiss inflation is now fully under control and the big risk is that the franc’s trend will seriously hurt exports (by raising prices too much) and lead the economy into a deflationary cycle.

From Capital Economics they agreed, although they had an even more negative point of view, “Following the SNB’s last monetary policy meeting in September, we have revised down our inflation forecast and now expect it to fall from 1.1% in 2024 to just 0.3% in 2025.” In this sense, “if oil prices fall or the franc strengthens, they could push inflation to the limit.” The firm clearly understands how close this scenario is. “A simple 5% appreciation of the franc would be enough to push the country into deflation. Although this is a significant increase, the franc has increased by an average of 3% every year for 15 years, it would not be a complete surprise.”

“The threat of deflation will likely force the SNB to be cautious and buy into the foreign exchange market in the coming months.”

Not so long ago, it seemed that the Swiss franc was beginning a quiet retreat. with a drop of 6% in the first half of the year. However, this summer, when the Fed and ECB began cutting rates, the currency soared and the whole process went into reverse, undoing what had seemed like a perfect operation. “As global deflation set in, the inflation differential with Switzerland’s Western trading partners fell to its historical average of 1-1.5 percentage points. Thus, the recent nominal appreciation of the franc has pushed its real effective exchange rate to a cyclical peak.” “They speak from Gavekal.

The firm’s economists explain that the contribution of imported goods subtracted four-tenths from the consumer price index in the August data due to the recent fall. Something that makes clear the importance of currency. “The Alpine nation is now ready to import deflation. “In addition, the strengthening puts pressure on the manufacturing sector, which has already asked the SNB to take measures such as massive currency purchases.”

In any case, Capital Economics believes that even if deflation is eventually coming, This will not become a systematic and structural trend, as has happened in the last decade. “The threat of deflation is likely to keep the SNB cautious in the coming months,” the firm said. In this sense, they are betting on aggressive currency purchases to keep prices low.” the main threat to Switzerland in 2025.