(Bloomberg) -- Swiss inflation slowed unexpectedly, strengthening the case for further interest-rate cuts and fueling worries of an undershoot of the central bank’s target.
Consumer prices rose 0.6% from a year ago in October, Switzerland’s statistics office said on Friday. That’s weaker than any economist in a Bloomberg survey had predicted. The median estimate was for the gauge to be unchanged from September’s 0.8%.
Price growth as measured by European Union methods was at 0.7%, far lower than the surrounding euro area’s 2% reading in data out on Thursday. While the Swiss National Bank was already widely expected to deliver a fourth consecutive rate cut in December, the danger of an inflation undershoot is raising the prospect of more aggressive easing.
“Given the SNB’s dovish guidance at its September meeting, benign inflation developments and a rise in geopolitical tensions adding further upward pressure to the currency, we now expect a 50 basis-point cut,” Katya Vashkinskaya, an economist at Goldman Sachs Group Inc., wrote in a report, in a change of forecast from a quarter-point move.
She predicts a follow-up 25 basis-point reduction in March, bringing the rate down to 0.25%. Analysts at Deutsche Bank AG meanwhile are wondering if the SNB may need to go even further and return borrowing costs to below zero, not least if Donald Trump prevails in the US presidential election.
“We see a material risk that the SNB could be the first central bank to re-enter a negative interest rate policy regime in 2025 if Trump wins,” Michael Puempel, Robin Winkler and Shreyas Gopal wrote in a report this week.
What Bloomberg Economics Says...
“A new interest-rate cut in December seems baked in at this point. We think the SNB will keep its pace unchanged at 25 basis points, but we now expect it will have to deliver a further rate cut in March 2025.”
—Maeva Cousin, senior economist. Read the full note here.
That outcome would keep Swiss officials focused on using borrowing costs instead of market interventions to defend the franc, to avoid being labeled again by the US Treasury as a foreign currency manipulator.
Earlier this week, SNB President Martin Schlegel reiterated earlier statements that more cuts could become necessary, and insisted that FX interventions and negative borrowing costs remain “in the toolbox.”
The data on Friday showed that the cost of hotels, package holidays, gasoline and diesel all fell, offsetting higher prices for clothes. The core reading — which excludes fresh and seasonal products as well as energy — also weakened to 0.6%.
Swiss inflation hasn’t accelerated since April amid an ongoing appreciation of the franc. By making imports cheaper, the currency’s exchange rate has a sizable impact on price pressures.
Also domestically, costs are set to decline. Next year, Switzerland expects electricity prices to drop and a key reference rate for rents to tick down, triggering a decrease in housing costs. This has seen economists warn that inflation could drop below 0%, the lower bound of SNB’s target range.
Karsten Junius, chief economist of Bank J Safra Sarasin in Zurich, said it’s “particularly worrying” that already at this reading, inflation excluding rents fell below zero — to -0.1% from a year ago.
“The underlying inflationary pressure is constantly falling,” he said in a report.
--With assistance from Simon Lee, Joel Rinneby and Alexander Weber.
(Updates with economist comments throughout)
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