Swiss deflation is here to stay

Inflation in Switzerland fell below zero for the first time in nearly three years in October and business surveys suggest that it will remain in negative territory until at least early 2020. (See Chart 1.) As it happens, we suspect that a combination of anaemic GDP growth and the disinflationary impact of the stronger franc will keep inflation below zero throughout 2020. This is particularly because we forecast the currency to come under renewed upward pressure early next year as investors wake up to the prospect of further easing by the ECB. We expect the SNB to follow its tried-and-tested model of intervening in the FX market to weaken the franc to begin with, before ultimately cutting its policy rate to -1.00% in early 2020.