A return to negative rates looks to be a given now for the SNB

With the latest inflation reading here, it looks like the SNB will have little choice but to mark a return back to negative rates. Headline annual inflation is back to zero for the first time since March 2021 while core annual inflation is also slowly nudging lower. If you strip out rent from the price calculation, inflation is in fact already in negative territory.

The worst part in all this is that a stronger Swiss franc will only add further downside pressure to imported inflation – which has been negative for 18 straight months now. The signs are all pointing to deflation returning and the SNB has to step up to the plate to try and not fall back into the rabbit hole.

The current policy rate is at 0.25% with the next meeting set for 19 June. A 25 bps rate cut is fully priced in for that but at this stage, I would argue that one shouldn’t rule out a 50 bps move (~8% priced in). The Swiss central bank has to act to send a strong message but considering the global outlook, even that might not be enough to stop this tidal wave from continuing to build.

The dollar’s plight has only exacerbated safety flows into the franc currency and even if the SNB resorts to intervention efforts, it will be tough to stem the tide. They are definitely in an unenviable position at the moment. And still, they will have little choice but to accept a return to negative rates or the backlash would be even worse to deal with.

This article was written by Justin Low at www.forexlive.com.