Swiss Inflation Declines Further, Strengthening Expectations for SNB Rate Cuts and Impacting the Swiss Franc

Market Anticipates Significant Rate Cuts by SNB

The latest inflation data has significantly boosted market expectations for further interest rate cuts by the Swiss National Bank (SNB). Following the December figures, the probability of a 25 basis point rate reduction in March surged to 98.4%, up from 91% previously. Economists like GianLuigi Mandruzzato of EFG Bank assert that another SNB rate cut in March is now virtually certain. The key question remains whether the SNB will opt for a more substantial 50 basis point cut, as seen in December, or maintain a 25 basis point reduction to mitigate the risks of prolonged low inflation.

Impact on the Swiss Franc Against Major Currencies

The weakening Swiss franc has been a direct consequence of the SNB's aggressive rate-cutting strategy. As the SNB continues to lower borrowing costs to stay ahead of other central banks and curb the franc's appreciation, the currency has faced downward pressure. A weaker franc makes Swiss exports more competitive but also reflects investor concerns about the central bank's commitment to combating deflationary risks. The franc's depreciation against major currencies like the euro and the dollar has implications for Switzerland's trade dynamics and overall economic stability.

Economists Predict Further Monetary Easing

Adrian Prettejohn of Capital Economics anticipates another rate cut by the SNB in March, driven by intensifying disinflationary pressures. He does not rule out additional cuts beyond the initial 25 basis points, especially if inflation remains stubbornly low. Gero Jung, chief economist at Mirabaud, expects the SNB to implement two more 25 basis point reductions in March and June 2025, potentially bringing the policy rate to 0%. These measures aim to address both the low inflation environment and the sluggish eurozone economy, which poses challenges for Switzerland's export-dependent sectors.

Consumer Prices Ease Further

On a month-on-month basis, Swiss consumer prices declined by 0.1% in December, matching the Reuters forecast. This decrease was driven by lower costs in vegetables and international holidays, contributing to the overall reduction in inflationary pressures. The SNB's ability to keep inflation within its target range of 0% to 2% since May 2023 has been pivotal in maintaining economic stability and supporting ongoing rate cuts.

SNB's Forward Guidance and Future Outlook

Although the SNB has refrained from commenting directly on the latest inflation figures, its forward guidance remains dovish. The central bank continues to monitor economic conditions closely and is prepared to adjust its monetary policy as necessary to ensure price stability over the medium term. With Swiss inflation expected to average 1.1% in 2024 and 0.3% in 2025, the SNB's proactive approach to rate cuts is aimed at fostering economic growth while preventing the franc from becoming excessively strong.

Conclusion

The persistent decline in Swiss inflation has solidified expectations for further rate cuts by the Swiss National Bank, with significant implications for the Swiss franc's performance against major currencies. As the SNB navigates the delicate balance between stimulating economic growth and maintaining price stability, the franc's fluctuations will remain a critical factor for investors and policymakers alike. The coming months will be crucial in determining the trajectory of Switzerland's monetary policy and its impact on the broader global financial landscape.