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Switzerland’s inflation rate has dipped into negative territory for the first time in four years, fuelling bets that the country will return to sub-zero interest rates in a bid to stave off a deflationary slump and restrain a soaring currency.
Annual inflation was minus 0.1 per cent in May, with prices for air transport and accommodation among those dragging on the consumer price index, data published on Tuesday showed. Prices rose 0.1 per cent month on month.
Traders have increased their bets in recent months that the Swiss National Bank will reduce interest rates to zero or below to deal with lagging inflation and a surge in the value of the Swiss franc, a haven currency that investors have bought up as a refuge from US President Donald Trump’s trade war.
The franc is one of the best-performing major currencies this year, up nearly 11 per cent against the dollar and outpacing peers such as the euro and the pound. That has taken the greenback close to SFr0.80 in recent weeks for the first time since a shock appreciation in the franc in 2015.
A stronger franc drags down Swiss inflation by reducing the cost of imports.
Mike Riddell, a fund manager at Fidelity, said signs of deflation were “going to make the SNB allergic to Swiss franc appreciation” that could exacerbate price falls.
He predicted that “any further upwards currency pressure” was likely to trigger FX market intervention by the central bank to weaken the currency. The SNB targets an inflation rate between zero and 2 per cent.
That would risk provoking the ire of the White House, which added Switzerland to a list of “currency manipulators” during the final weeks of Trump’s first presidency. It was later removed from the list under Joe Biden’s administration.
“That’s a delicate situation they are in,” said Daniel Kalt, chief investment officer for Switzerland at UBS Global Wealth Management. “You don’t want to be perceived as a currency manipulator while you have these trade talks with the US.”
The path of the franc will be crucial, Kalt said, adding “we’ve not even seen the whole pass-through” from the recent strength into consumer prices.
Switzerland has historically sought to restrain its currency, viewed as a financial market haven due to the country’s relative political and economic stability.
The SNB held interest rates below zero for eight years before returning to positive territory in 2022 and built up a vast portfolio of international assets through its currency interventions.
The market is now pricing in two quarter-point rate cuts by the December SNB meeting, which would take the policy rate to minus 0.25 per cent. One of those is expected to come at the meeting later this month.
The two-year Swiss government bond yield fell as far as minus 0.24 per cent on Tuesday, its lowest in three years. Yields up to six years in maturity traded below zero on Tuesday.
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