Swiss National Bank warns of economic fallout from trade conflict

By John Revill

BERN (Reuters) -Increased global economic risks will likely weigh on Switzerland's economic growth, Swiss National Bank Chairman Martin Schlegel said on Friday, adding the current turmoil over U.S. tariffs made maintaining stable prices in Switzerland ever more important.

Uncertainty around trade policy is currently "very high", Schlegel told the SNB's annual general meeting in Bern, while there was a real danger global economic integration would be damaged in the longer term.

Export-orientated Switzerland, which is facing a 31% tariff on its shipments to the United States, feels the impact of protectionism particularly strongly, he said, with growth likely to be slower than previously expected.

"The uncertainty surrounding the trade policy situation is very high," Schlegel said in a speech to the central bank's annual general meeting. "It remains very uncertain how inflation and the economy in Switzerland will develop.

"However, an economic slowdown cannot be ruled out," he said. "Growth is likely to be lower than was expected just a few weeks ago."

In its last forecast in March, the SNB said it expected Swiss GDP to grow by 1% to 1.5% this year, below its average rate of 1.8%.

Schlegel did not mention the shocks caused by U.S. President Donald Trump's tariff policy, but said events like Russia's attack on Ukraine and the coronavirus pandemic had raised the possibility of a fragmented world economy.

He acknowledged that central banks cannot shape the global trading system or prevent tariffs or protectionism. However, in the current environment, stable conditions were more important than ever before, Schlegel said.

The SNB targets an inflation rate of 0-2%, which it terms price stability.

The target was an important prerequisite for prosperity by making purchasing and investment decisions easier, while also supporting social cohesion, as poorer households would be worst hit by rising prices.

The SNB has reached its goal for the last two years, but recent low readings have prompted concerns inflation may fall below zero. Inflation stood at 0.3% in March.

The SNB would adjust its monetary policy if necessary, Schlegel said, adjusting interest rates and carrying out foreign currency interventions if needed.

Still, there were limits to how much price stability could help as the current situation could lead to delayed investment and purchasing decisions, Schlegel said.

"Price stability cannot prevent trade policy uncertainty," Schlegel said. "However, stable prices are an important basis for the smooth functioning of the economy."

(Reporting by John Revill; Editing by Susan Fenton)