The Swiss National Bank (SNB) cut its key interest rate for the fourth time in December 2024, by 25 basis points. This decision was anticipated, particularly by investors. The current disinflation, with prices rising by +0.7% year-on-year, is expected to continue due to the appreciation of the Swiss franc in recent quarters, which is now affecting imported goods and services. As a result, the average inflation forecast for 2025 has been revised downwards from +0.6% to +0.3%.
Further declines are now expected for 2025. Mr. Schlegel, the governor of the SNB, has confirmed that further rate cuts are highly likely. Investors anticipate a decline in the SNB rate to around 0% in the first half of 2025. However, this decline will be less pronounced than in the United States or the eurozone. In response, the Swiss franc is expected to continue to appreciate in the short, medium, and long term. In an interview with Bloomberg, Mr. Schlegel indicated that market conditions for the Swiss franc were appropriate—or that the Swiss franc was not overvalued—while the SNB confirmed in its statement that the currency purchases seen during the summer would continue.
Swiss economic fundamentals justify a reduction in interest rate differentials between foreign markets and Switzerland, leading to the appreciation of the Swiss franc. The SNB’s role will therefore be to slow down this appreciation against the dollar and the euro, ensuring that it occurs more gradually. This strategy reflects the theories put forward in academic works such as those by Borio and Disyatat (2011), which emphasize the importance of monetary policy in stabilizing global and local financial conditions.
For the Swiss National Bank, 2024 will have been a pivotal year. The risk of economic overheating and inflation above +2% is no longer the main concern, although rents continue to rise by +3.3% year-on-year. Conversely, the risk of deflation is now a cause for concern and is already a reality for more than a quarter of Swiss households’ daily expenses: imported inflation is currently -2.3% year-on-year. This situation reflects the dynamics described by Svensson (2003), who analyzed the challenges faced by central banks in simultaneously managing inflationary and deflationary risks.
Structural Factors of Deflation
Deflation in Switzerland is a risk linked to four structural factors. First, the global economic slowdown is more pronounced in the eurozone. Germany, and to a lesser extent France and Italy, are important trading partners. Weak growth momentum in these countries reduces opportunities in external markets, which dampens demand and price increases. Second, the appreciation of the Swiss franc, which has appreciated by an average of +3% per year over the past 70 years, is contributing negatively to inflationary pressure. The economic slowdown is thus exacerbating price declines in Switzerland. Third, wage growth has historically been lower than productivity growth. While this is positive for competitiveness, it limits the growth potential of private consumer spending.
These factors are consistent with Taylor’s (1993) research, which highlights the importance of the Taylor rule for adjusting interest rates according to output and inflation gaps. The SNB’s strategy seems to reflect this rule by actively responding to economic pressures.
The SNB’s Options for Containing Deflation
The fourth factor may require further action by the SNB. The economic slowdown could lead banks to become more selective in granting new loans in the medium term. To avoid an excessive contraction in credit supply, which would further slow economic activity and promote a return to deflation, the SNB has three main options.
- The first option is to continue lowering the key interest rate, a measure widely anticipated by the markets. This approach aims to reduce the incentive for banks to deposit their excess reserves with the SNB and to stimulate lending by making the cost of capital more attractive.
- The second option would be to lower the interest rate on sight deposits exceeding the threshold determining their remuneration. Currently, these deposits above the threshold are remunerated at 0.5%, but this remuneration could be quickly lowered to 0%. This would further reduce the attractiveness of holding unused liquidity at the SNB.
- Finally, the third option would be to lower the coefficient determining this threshold. This would significantly increase the amount of excess reserves remunerated at the key interest rate, thereby encouraging banks to redirect these funds towards lending.
The goal of price stability will therefore push the SNB to focus more on deflationary pressures in our economies. This dynamic illustrates the observations of Mishkin (1997), who emphasizes that the credibility of central banks is crucial for anchoring market expectations and preventing deflationary spirals.
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Academic references:
Borio, C., & Disyatat, P. (2011). « Global and the financial crisis: Link or no link? »
Svensson, L. E. O. (2003). « Escaping from a liquidity trap and deflation: The foolproof way and others. »
Taylor, J. B. (1993). « Discretion versus policy rules in practice. »
Mishkin, F. S. (1997). « Strategies for controlling inflation. »
