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Switzerland’s inflation rate has dropped into negative figures for the first time in four years, raising expectations that the nation may revert to below-zero interest rates to prevent a deflationary downturn and curb a rising currency.
In May, the annual inflation rate was recorded at minus 0.1 percent, with declining prices in air travel and accommodation significantly impacting the consumer price index, according to data released on Tuesday. Prices saw a slight increase of 0.1 percent month-on-month.
Recently, traders have grown increasingly confident that the Swiss National Bank will lower interest rates to zero or even below to address stagnant inflation and the soaring value of the Swiss franc, which investors flock to amid the trade tensions caused by US President Donald Trump.
This year, the franc has been one of the strongest major currencies, appreciating almost 11 percent against the dollar and outperforming the euro and pound. It has brought the dollar close to SFr0.80 in recent weeks for the first time since a surprising rise in the franc in 2015.
A strengthening franc contributes to lower Swiss inflation by making imports cheaper.
Mike Riddell, a fund manager at Fidelity, mentioned that signs of deflation might make the SNB particularly sensitive to the appreciation of the Swiss franc, as that could further drive down prices.
He anticipates that any additional upward pressure on the currency could lead to intervention by the central bank in the foreign exchange market to depreciate the franc. The SNB aims for an inflation rate within the range of zero to 2 percent.
This situation could frustrate the White House, which designated Switzerland as a “currency manipulator” during the final weeks of Trump’s presidency; however, it was removed from this list under the Biden administration.
“They are in a tricky position,” stated Daniel Kalt, chief investment officer for Switzerland at UBS Global Wealth Management. “Being viewed as a currency manipulator could complicate trade discussions with the US.”
Kalt emphasized that the direction of the franc is critical, noting, “We haven’t fully seen the impact” of its recent strength on consumer prices.
Historically, Switzerland has aimed to limit its currency’s strength, which is considered a safe-haven asset due to the country’s relative political and economic stability.
The SNB kept interest rates below zero for eight years before raising them to positive levels in 2022 and amassed a significant portfolio of international assets through intervention in the currency market.
Market forecasts now anticipate two cuts of a quarter-point by the SNB before their December meeting, potentially lowering the policy rate to minus 0.25 percent, with one cut expected at their upcoming meeting this month.
The yield on two-year Swiss government bonds fell to minus 0.24 percent on Tuesday, marking its lowest level in three years. Yields for bonds with maturities up to six years were trading below zero that day.
