Swiss inflation turns negative for first time since COVID pandemic

Swiss inflation fell to -0.1% in May, the first negative reading since March 2021, increasing pressure on the Swiss National Bank (SNB) to cut interest rates at its June 19 meeting. Markets are pricing in a 69% probability of a cut to 0% from the current 0.25%, and a 31% chance of a deeper cut to -0.25%, potentially returning Switzerland to negative interest rates.

Analysis

Swiss inflation unexpectedly turned negative in May, with consumer prices declining by 0.1% year-over-year, marking the first such decrease since March 2021 during the COVID-19 pandemic. This development intensifies pressure on the Swiss National Bank (SNB) to implement a significant interest rate cut at its forthcoming meeting on June 19. Market participants now widely anticipate monetary easing, assigning a 69% probability to a rate reduction from the current 0.25% to 0%. Furthermore, there is a notable 31% probability priced in for a more substantial cut to -0.25%, which would signal Switzerland's return to a negative interest rate environment, a policy previously in place from late 2014 until 2022. The SNB has officially declined to comment on this latest inflation data.

Key Decisions for Investors

• Investors should prepare for increased downward pressure on the Swiss Franc (CHF) given the deflationary print and the high likelihood of SNB rate cuts.
• Consider re-evaluating exposures to Swiss interest rate-sensitive assets, as the SNB's policy response could significantly impact yields and valuations.
• Monitor the SNB's June 19th policy announcement closely, particularly for guidance on the potential depth of rate cuts and the likelihood of a return to negative interest rates, which could have broader implications for asset allocation.