Switzerland’s Consumer Price Index is set to show continuing deflation as prices shrink -0.7% in the year to August, marking the fifth consecutive month in negative territory. As we noted earlier this week, the danger is that steadily lower CPI will translate into expectations of lower prices in the future, encouraging consumers and businesses to perpetually delay spending and investment as they wait for the best possible bargain and bringing economic growth to a virtual standstill. The Swiss National Bank has explicitly committed to “take firm action to prevent an appreciation of the Swiss franc”, keeping a lid on the currency’s purchasing power and thereby limiting the drop in prices in terms of the domestic monetary unit. It is much easier for policymakers to drive down the Franc than to support its value because they can simply print more money and let it loose into circulation, suggesting it should not be too difficult for the SNB to keep down the exchange rate. Naturally, currency markets are well aware of this, and traders may move to pre-empt central bank to sell the Franc as another negative CPI reading crosses the wires.
Al Bawaba
