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Switzerland Faces Deflation

Back in February the interim chairman of the Swiss National Bank Thomas Jordan expressed concerns about risks of deflation in Switzerland. With the Eurozone being Switzerland's largest trading partner, he was quite concerned.

Reuters: - "If the risk scenario of a further escalation of the debt crisis were to materialize, economic activity in Switzerland would suffer a much more pronounced slowdown than just described," he said in a speech at a business event. "Such a development would lead to a severe risk of deflation."

Jordan was right. Switzerland is now in the midst of what could become a prolonged deflationary environment as can be seen from the CPI numbers.

Swiss CPI CHart

Similarly the PPI number that came out this morning was negative 2.3%, as wholesale prices stay stubbornly below last year's. That means that as deposits flow into the country from the Eurozone, the SNB will keep defending the 1.2 EUR-CHF exchange rate peg. Switzerland's deflation could accelerate should the currency become stronger and the central bank can not afford for that to happen. And if the Eurozone crisis were to worsen, the SNB may even consider imposing capital controls, as Thomas Jordan recently pointed out (unfortunately the quote is only available in German).

SonntagsZeitung: - Eine Massnahme wären Kapitalverkehrskontrollen, also Vorkehrungen, die den Zufluss von Kapital in die Schweiz direkt beeinflussen. Ich kann hier nicht in die Details gehen. Wir identifizieren diese Instrumente für den Fall, dass weitere Massnahmen nötig wären.

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