• Swiss Franc is vulnerable as inflation data continues to undershoot official forecasts. 
• The SNB expected inflation to average 1.9% in 2024 in its December forecast, but it currently sits at 1.2%. 
• The latest Producer and Import Prices showed the tenth month of deflation in a row. 

The Swiss Franc (CHF) is continuing its overall trend lower at the end of the trading week – down by a few hundredths of a percent in its European crosses but edging higher against the US Dollar (USD). 

In its latest macroeconomic data release, Swiss Producer and Import Prices continued their deflationary trend in February, registering deflation for the tenth consecutive month at minus 2.0% (from negative 2.3% in January), according to data from the Federal Statistical Office. Swiss Franc at risk as inflation remains below SNB forecast

The Swiss Franc could be vulnerable to weakening further as inflation in Switzerland steadily declines and looks increasingly likely to undercut official forecasts. 

In its latest batch of data, Swiss headline inflation rose 1.2% YoY in February, down from 1.3% in January, and increased 0.6%, up from 0.2% in January, on a month-on-month basis. 

The data shows that inflation is undercutting the Swiss National Bank’s (SNB) own forecasts, which at its December policy meeting expressed the view that inflation would start rising from the 1.4% registered in November. 

“However, inflation is likely to increase again somewhat in the coming months due to higher electricity prices and rents, as well as the rise in VAT.” The SNB said in its December policy statement. 

The SNB implemented a rate hike of 0.25% in June 2023, raising rates from 1.50% to 1.75% to combat the threat of higher inflation. However, given the opposite has happened and inflation has actually come down quicker than expected, there is now a risk it could cut interest rates, which would be negative for the Swiss Franc, since lower rates attract less inflows of foreign capital. 

The possibility of a change in policy is increased by the fact that inflation is running well below the SNB’s 1.9% forecast for 2024. Although there is only two months of data so far, it will have to rise substantially to meet the bank’s forecast before the end of the year. The SNB’s next policy meeting is on March 21.