Switzerland remains focused on deflation risk as SNB set to hold rates

The Swiss National Bank is anticipated to hold its key rate at 0% today, with the details surrounding the decision drawing more attention than the decision itself.

A Reuters poll of economists indicated unanimous expectations for a rate hold, shifting the spotlight to the central bank's commentary on inflation and the franc.

At first glance, inflation appears to be a topic worth revisiting. Headline Swiss inflation rose to 0.8% in August, the highest level since 2024. However, a closer look reveals less cause for concern, as the rise was driven primarily by energy costs. Core inflation stands at only 0.4%.

This distinction underscores how Switzerland remains an outlier compared to many other economies.

The franc has long been a challenge for the SNB. Its strength acts as a built-in check on inflation by reducing import costs, and the central bank has explicitly noted that franc appreciation curbs price pressures.

The SNB defines price stability as inflation of 0% to 2%, placing the current 0.8% figure firmly within that band. Arguably, it remains closer to the lower bound than the upper one.

Switzerland's persistent challenge has been preventing inflation from falling to zero, especially when safe-haven flows drive the franc higher. This is why the SNB's future policy path may diverge from other central banks.

Should disinflation re-emerge, currency intervention would probably be the initial response. The SNB has signaled it is more ready than before to step in against undue franc strength.

Yet negative rates cannot be dismissed entirely. While policymakers are hesitant to adopt unconventional tools again because of their drawbacks, they could eventually run out of alternatives.

Against this backdrop, the rate decision itself seems almost incidental.

More attention should be paid to the revised inflation projections and, crucially, the language regarding the franc. No changes to the latter are anticipated for now.

The SNB is likely to bide its time, watching the impact of higher oil prices and bond yields, and monitoring developments in the Middle East over the medium term.

However, as most economies battle elevated inflation, Switzerland could once again face the opposite problem before long.