This was particularly surprising, as in April Switzerland’s inflation rate slid further into negative territory. This stunning development has triggered speculation about potential policy shifts from the Swiss National Bank (SNB). The nonseasonally adjusted headline inflation rate remaining at 0.0% year-over-year. This was below market expectations of 0.2% and down from the prior read of 0.3%. This seemingly counterintuitive finding has led to a flurry of speculation. To date, many think the policy rate can go down to 0% by June with ongoing shifts in economic conditions.
The core rate of inflation was 0.6% YoY for that month. This figure is net of volatile components such as energy and food. This figure serves as a drop from last month’s core inflation coming in at 0.9%. So the very soft inflation print that has economists and other analysts wringing their hands should be a surprise to nobody. It is well below the SNB’s prediction of a 0.3% inflation for the second quarter of this year.
This year’s dramatic appreciation of the CHF in real terms has added a new layer of complexity to the mix. First, it has gotten a lot stronger against other currencies, putting a powerful lid on imported inflation. The strong CHF—and with it, declining energy prices—has led to increasingly muted price pressure here at home in Switzerland.
Analysts from Danske Bank highlighted that “the low inflation print reflects the recent decline in energy prices but can largely be attributed to the recent strengthening of the CHF, which puts significant downward pressure on imported inflation.” The economic backdrop for the Swiss National Bank is deteriorating. Combined with trade war uncertainties, this has added new stresses on an already beleaguered manufacturing sector.
Recent global market trends have played against Switzerland’s overall economic picture. Interestingly, the current elevated CHF and the sustained trade war with China pose considerable discomfort to domestic manufacturers. These factors may inhibit future growth rates and upset general price stability. Economists believe there is an increased likelihood of us going back to negative interest rates (NIRP). Just a few months ago, they would have considered this scenario improbable.
Danske Bank’s analysts noted, “More broadly, price pressures remain very muted in Switzerland. The growth backdrop has likewise worsened for the Swiss economy the past month with trade war uncertainty and the strong CHF acting as a headwind for the manufacturing sector.” They added, “Markets reacted by pricing just above 30bp worth of cuts for the next SNB meeting in June and 45bp for 2025 and hence a return to a negative interest rate policy.”
Reinforcing this view, according to analysts we reported that they doubled down on their forecasts for imminent policy shifts by the SNB. We maintain our deeply held and longstanding call of the policy rate being cut to 0% in June. After yesterday’s print, the chances of a return to NIRP have obviously taken a turn for the worse,” they wrote.
April’s inflation data certainly bolsters the case for a policy course change from the SNB. Analysts are saying that financial markets are already aggressively pricing these expected moves. The potential for FX intervention before reaching negative territory is on the table as the SNB seeks to stabilize economic conditions.