In Switzerland, inflation fell 0.0% in April. The strong franc accentuated the downward pressure on inflation. This increases the pressure on the SNB to lower its rates in June.
The prospects for a new drop in rates by the Swiss National Bank (BNS) have now strengthened. Inflation fell to 0.0% in April, with lower inflation rates in most sectors. Due to the strong appreciation of the Swiss franc, the downward pressures on inflation have increased. The Swiss franc appreciated about 4% compared to a basket of weighted currencies on trade since the last meeting of the BNS in March, this appreciation being mainly due to the increase of 7% compared to the US dollar.
Slowdown in economic dynamics
In addition, the first indicators collected report a significant slowdown in economic activity, in particular in the manufacturing sector, while the sharp increase in American customs duties and increased risks for global growth weigh on the prospects of the Swiss economy.
-In this context, we anticipate an additional drop of 25 base points in the key rate of the SNB, to 0.0%, in June. The vigor of the Swiss franc could also lead to interventions on the exchange market to counter the upward pressures. At the same time, the risks of falling interest rates in negative territory have increased. A BNS negative rate policy does not correspond to our basic scenario, but cannot be excluded if global economic prospects are deteriorating and if the risks of deflation in Switzerland increase in the coming months.
A high Swiss franc
The Swiss franc remains at high levels, although a new drop in rate of 25 basic points has been anticipated and the probability of negative rate has increased. We recently revised our EUR/CHF forecasts at 3 months to 0.95, indicating that the BNS should react to the force of the franc by interventions or a drop in rates, which would accentuate the expected differential in terms of interest rates.
In the longer term, we remain optimistic about the structural trend upwards, due to the increase in its fair value and its refuge value characteristics, which will probably continue to benefit the franc, since we expect the American policy to continue to be erratic. This is reflected in our forecast at 12 months of EUR/CHF 0.92.
