Swiss deflation confirms likely june policy rate cut

Summary

The release of Switzerland's CPI report for May should be enough, in our view, for the Swiss National Bank (SNB) to cut rates at its upcoming June 19 meeting. The headline CPI fell 0.1%, the first foray into deflationary territory since early 2021, while a continued disinflationary trend was evident for underlying price measures.

Taking into account recent Swiss inflation data, widespread expectations among market participants for further SNB easing and an increasing possibility of a more-dovish European Central Bank going forward, we have adjusted SNB policy outlook. We now see one more 25 bps SNB rate cut, to a policy rate of 0.00%, at the June 19 meeting.

Beyond the June meeting, we see a less persuasive case for further easing, as the Swiss economy has shown a degree of resilience. In our view, further rate cuts after June would likely only materialize if there was a significant deceleration in economic activity and if we saw deflation become evident in underlying price measures as well. At this time, we believe that 0.00% will be the low for this monetary easing cycle.

Swiss Deflation Confirms Likely June Policy Rate Cut

Today's release of Switzerland's May CPI was the key remaining data point ahead of the Swiss National Bank's (SNB) monetary policy announcement on June 19 and will, we think, be enough for the central bank to deliver on widespread expectations for a further rate cut. The May headline CPI dipped 0.1% year-over-year, which matched the consensus forecast but was still the first foray into deflationary territory since March 2021. Meanwhile, the details of today's report point to a disinflationary trend in underlying price metrics, but not yet one of outright deflation. In May, for example, core inflation eased to 0.5%, domestic inflation slowed to 0.6%, and services inflation slowed to 1.1%. Trimmed mean inflation, which is released with a slight lag, rose 0.7% in April. Overall, we view recent Swiss inflation trends as providing reasonable rationale for further monetary easing, though not necessarily an “open and shut” case for rate cuts.

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