Swiss Franc Declines Prior to SNB Gathering

Swiss Franc (CHF) is witnessing a decline on Wednesday across its most heavily traded pairs, ahead of the week’s pivotal event for the currency: the Swiss National Bank (SNB) policy meeting scheduled for Thursday.

This downturn may stem from traders’ apprehensions regarding the heightened risk of SNB altering its messaging or even reducing interest rates during the meeting, in response to substantial declines in both inflation and growth over the past year.

Swiss Franc Faces Risk Amidst Declining Growth and Inflation
In 2023, inflation in Switzerland experienced a significant decline, dropping from 3.2% in the first quarter to 1.6% in the fourth quarter. The average inflation rate for the year decreased from 2.8% in 2022 to 2.1% for the year, as reported by the SNB in its Annual Report for 2023.

The most recent inflation data for 2024 indicates a further decrease, with the Consumer Price Index (CPI) rising by 1.2% year-on-year in February, down from the 1.3% recorded in the previous month, according to the Federal Statistical Office.

This trend is lower than what the SNB had anticipated at its December meeting, when it forecasted that inflation, then at 1.4%, would likely “increase somewhat in the coming months due to higher electricity prices and rents, as well as the rise in VAT.”
While the SNB projects an average inflation rate of 1.9% for 2024, the current inflation rate remains notably lower at 1.2%. However, on a monthly basis, there was an acceleration, with the CPI increasing by 0.6% in February compared to 0.2% previously.

Inflation is notably lower than the SNB’s initial forecast for the first quarter, which stood at 1.8%. According to Reuters, consumer price inflation is currently running 0.6 percentage points below the bank’s forecast, with core inflation at 1.1%, marking its lowest level since January 2022.

Swiss GDP Nearly Halved in 2023
Economic growth in Switzerland showed a considerable slowdown in 2023 compared to 2022.According to the State Secretariat for Economic Affairs (SECO), the initial estimate indicates that GDP growth, adjusted for seasonal effects and sporting events, was 1.3% in 2023.

This figure represents a significant deceleration from the 2.5% growth recorded the previous year, as stated in the bank’s 2023 Annual Report.The deceleration in both inflation and growth prompts speculation about whether the SNB will need to implement policy easing and reduce its 1.75% policy rate.

According to a Reuters report published on Monday, the likelihood of the SNB cutting interest rates on Thursday stands at 29%. A rate cut would likely lead to a weakening of the Swiss Franc, as lower interest rates tend to attract fewer foreign capital inflows.

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