Swiss inflation dipped into negative territory in May, marking the first annual drop in consumer prices in over four years and increasing the likelihood that the Swiss National Bank (SNB) will implement a significant rate cut later this month.
Data from the Federal Statistics Office on Tuesday showed consumer prices declined by 0.1% year-on-year, the lowest figure since March 2021, during the peak of the COVID-19 pandemic’s impact on the Swiss economy.
The market is almost certain that the SNB will cut interest rates at its upcoming meeting on 19th June, assigning a 69% chance that rates will be lowered from the current 0.25% to 0%, Reuters reports.
In addition, there is a 31% probability that the SNB will push rates further down to -0.25%, bringing Switzerland back to the period of negative interest rates that lasted from late 2014 until 2022.
Chairman Martin Schlegel stated last week that the central bank would focus on the medium-term inflation outlook rather than reacting to data from a single month, though he has also indicated the SNB wouldn’t hesitate to reintroduce negative interest rates if needed.
ING economist Charlotte de Montpellier, who predicts a 25-basis point rate cut in June followed by another in September, suggested the central bank would likely be “very annoyed” by the recent drop in inflation.
She added that the negative inflation was primarily driven by the strong Swiss Franc, which lowered the cost of imported goods by 2.4%, along with a significant decline in energy prices.
“I think that rates will indeed go back into negative territory,” De Montpellier stated.
“I think the SNB will want to stop at -0.25% for the rate ... but the risk is that the situation will deteriorate even further if the Franc becomes even more expensive and oil prices continue to fall and that it will have to go even further negative.”
Furthermore, economists at UBS and EFG Bank also anticipate a 25-basis point interest rate cut by the central bank this month.
Whereas Rudolf Minsch, chief economist at the business association economiesuisse, expects just one 25-basis point cut, either in June or September, after which he believes the central bank will pause further easing.
“If oil prices stay around the current level, we won't have any additional effects that would lead to further price reductions over the coming months. Domestic inflation is still positive,” said Minsch.
“So the central bank has a bit more leeway to wait before going into negative rates.”