Strong Franc Revives Disinflation Headache in Switzerland

(Bloomberg) --

Swiss inflation slowed to the weakest since 2016 and is now barely above zero, reflecting the franc’s rally against the euro.

A day after South Korea reported the first annual drop in prices in more than a half-century of records, Switzerland said its rate fell to just 0.1% in September from 0.3%. That’s at the very lower end of the Swiss National Bank’s target range, which is rising prices at a rate below 2%.

The drop follows a surge in the currency this year that the SNB has attempted to curb with currency market interventions. The franc hit a two-year high versus the euro in early September, and the central bank slashed its inflation forecasts.

With its benchmark already at -0.75%, the central bank has so far resisted cutting interest rates, despite a reduction last month by the European Central Bank.

Yet the KOF institute on Wednesday predicted a cut of as much as 25 basis points before year-end. The next scheduled policy decision isn’t due until December, but the SNB has a history of surprises if it feels it needs to act before then.

Policy makers say the franc is highly valued and they continue to threaten to sell the franc as needed to stem its appreciation. Governing Board Member Andrea Maechler said Wednesday that monetary policy must remain expansive, Reuters reported.

The SNB sees prices rising just 0.2% next year, recovering slightly to 0.6% the following year.

--With assistance from Catherine Bosley.

To contact the reporters on this story: Fergal O'Brien in Zurich at fobrien@bloomberg.net;Jan Dahinten in Zurich at jdahinten@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, Fergal O'Brien

©2019 Bloomberg L.P.