Switzerland's inflation rate turned negative in May, reaching -0.1%, marking the first deflationary period in four years. This development has fueled speculation that the Swiss National Bank (SNB) might implement sub-zero interest rates to combat deflation and moderate the franc's value.
The decline in the consumer price index was influenced by factors such as reduced air transport and accommodation costs. Month-on-month, prices saw a slight increase of 0.1%.
Concerns about low inflation and the franc's strength are driving the potential for a Swiss interest rate cut. Investors have sought refuge in the Swiss franc amid global economic uncertainties, leading to its appreciation. The strong franc impacts Switzerland's inflation rate by lowering import costs.
The Swiss franc has appreciated nearly 11% against the dollar this year. The dollar recently approached SFr0.80, a level unseen since 2015.
Fidelity's Mike Riddell suggests deflation signs will make the SNB averse to franc appreciation, potentially triggering intervention to weaken the currency. Such actions could draw criticism from the U.S., which has previously labeled Switzerland a currency manipulator.
The market anticipates two quarter-point rate cuts by the SNB by December, potentially lowering the policy rate to -0.25%. Short-term government bond yields have already turned negative, with the two-year bond yield hitting a three-year low of -0.23%.
The SNB's upcoming decisions will be closely monitored as it addresses negative inflation and a strong currency. It must balance stimulating the economy with potential international repercussions.