Switzerland is currently facing an economic paradox resulting from the strength of the Swiss franc. As inflation slowed significantly in August, the year-on-year inflation rate dropped to 1.1%, down from 1.3% in July, falling below the expected 1.2%. This decrease also sets inflation for the third quarter of 2024 at a level well below the Swiss National Bank’s (SNB) projected 1.5%. However, this seemingly positive inflation trend is masking a deeper issue: the strength of the Swiss franc, which is now contributing to deflationary pressures.
During the post-pandemic surge in global inflation, which occurred between 2022 and 2023, the SNB took decisive action to bolster the Swiss franc. The goal was to curb imported inflation by fostering the franc’s appreciation. This strategy was largely successful and distinguished Switzerland’s economic trajectory from other Western European countries. The downside to this strategy is now becoming apparent. With Swiss inflation below target and global inflation receding, the risk is that the franc’s strength could significantly damage Swiss exports and potentially tip the economy into a deflationary cycle.
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