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Switzerland’s inflation rate has fallen into negative territory for the first time in four years, leading to speculation that the country may resort to sub-zero interest rates to counter a potential deflationary crisis and curb the rise of its currency.
In May, annual inflation stood at minus 0.1 per cent, with prices for air travel and accommodation contributing to the decline in the consumer price index, as revealed by data released on Tuesday. Prices saw a 0.1 per cent increase on a monthly basis.
Traders have been increasingly betting on the Swiss National Bank implementing zero or negative interest rates to combat sluggish inflation and the surge in the Swiss franc’s value, which has been sought after as a safe haven amidst the uncertainties of the US-China trade tensions.
The Swiss franc has been one of the top-performing major currencies this year, appreciating by nearly 11 per cent against the US dollar, surpassing the euro and the pound. This has pushed the dollar close to SFr0.80 in recent weeks, a level not seen since the franc’s sudden appreciation in 2015.
A stronger franc dampens Swiss inflation by reducing the costs of imported goods.
Mike Riddell, a fund manager at Fidelity, warned that signs of deflation could make the SNB wary of further strengthening of the Swiss franc, potentially worsening the deflationary pressures.
He anticipated that any additional upward pressure on the currency could prompt the central bank to intervene in the forex market to weaken the franc. The SNB aims to maintain an inflation rate between zero and 2 per cent.
However, such measures could draw criticism from the White House, especially after Switzerland was previously labeled as a “currency manipulator” during the Trump administration, a designation that was later removed under President Biden.
According to Daniel Kalt, chief investment officer for Switzerland at UBS Global Wealth Management, the trajectory of the franc will be crucial in determining future actions, as the full impact of its recent strength on consumer prices is yet to be fully realized.
Switzerland has traditionally sought to control its currency, given its reputation as a financial safe haven owing to the country’s stable political and economic environment.
The SNB maintained negative interest rates for eight years before transitioning to positive rates in 2022, while also accumulating a substantial portfolio of international assets through its currency interventions.
The market is currently pricing in two quarter-point rate cuts by the SNB meeting in December, which would bring the policy rate to minus 0.25 per cent, with one of these cuts expected to be announced at the upcoming meeting later this month.
On Tuesday, the two-year Swiss government bond yield dropped to as low as minus 0.24 per cent, its lowest level in three years, with yields of up to six years maturity trading below zero.