TLDR:
- Swiss inflation slowed to 0.8% in September, a 3-year low
- The Swiss National Bank (SNB) cut interest rates for the third time in 2024
- New SNB Chairman Martin Schlegel doesn’t rule out negative interest rates
- Downward risks for inflation are seen as greater than upward risks
- The strong Swiss franc poses challenges for exporters, but weak foreign demand is the main issue
Swiss inflation has dropped to its lowest level in over three years, prompting discussions about further interest rate cuts by the Swiss National Bank (SNB).
In September, consumer prices rose by just 0.8% compared to the previous year, falling below economists’ expectations and marking a significant decrease from August’s 1.1% rate.
The slowdown in inflation was largely due to falling costs for holidays, air travel, and fuel, which offset rising prices for clothing and footwear. Core inflation, which excludes volatile items like fresh food and energy, also retreated to 1%.
This development aligns with the broader trend of disinflation in the surrounding euro area. The SNB, under the leadership of its new president Martin Schlegel, has already reduced borrowing costs three times in 2024. During the most recent rate cut, Schlegel indicated that more reductions were likely.
In a recent speech, Schlegel highlighted that Swiss inflation is currently driven solely by services, while goods prices are declining. He noted that about half of the remaining inflation is due to rising rents.
The unexpected drop in inflation has led economists to speculate about the size of potential future rate cuts. Some believe the SNB might consider more aggressive reductions, potentially lowering the policy rate to 0.5% by early 2025.
Switzerland’s strong currency, the franc, is playing a significant role in keeping inflation low. However, this strength poses challenges for Swiss exporters, although Schlegel emphasized that weak foreign demand is the primary issue facing these companies.
Looking ahead, further downward pressure on inflation is expected. Electricity charges are set to decrease by about 12% in January, as Swiss consumers’ power bills are only adjusted annually and are regulated by a government agency. Additionally, lower SNB borrowing costs are likely to reduce a key reference rate for rents, potentially leading to a drop in housing costs from mid-2025.
Despite these positive indicators for consumers, Swiss households are facing some price pressures not captured in the official inflation measure. For instance, health insurance premiums are set to rise by 6% next year, but this increase is not included in the official gauge.
In light of these developments, Schlegel has not ruled out the possibility of reintroducing negative interest rates, a tool the SNB has used in the past to manage the strength of the franc. He stated that the risks for Swiss inflation are currently tilted downwards, and the central bank cannot exclude any measures to address this situation.
As of October 2024, markets have priced in a high probability that the SNB will cut rates again to 0.75% at its December meeting.
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