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The Swiss Franc faces headwinds as the Swiss National Bank (SNB) now looks set to cut interest rates by 50 basis points following a soft inflation print.
Swiss CPI inflation read at -0.1% month-on-month in November, which is in line with expectations and unchanged from October's reading.
The year-on-year reading now stands at just 0.7%, which is just above the 0.6% produced in October but below the estimate of 0.8%.
"CHF is underperforming most major currencies," says Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman. "Swiss inflation is tracking below the bank’s Q4 forecast of 1.0%, leaving plenty of room for the Swiss National Bank’s (SNB) to keep slashing the policy rate."
The Swiss Franc has underperformed its global peers over the past week and month. Headwinds include broadly supportive global investor sentiment and expectations that Switzerland's interest rates are on a steady march back to 0%.
"The inflation rates in November confirmed the low-price pressure that the economy is exhibiting for several months now. We expect a further decline of inflation in the coming months such that risks to price stability are clearly on the lower side," says Dr. Karsten Junius, Chief Economist at Bank J. Safra Sarasin.
J. Safra Sarasin says capacity utilisation in the economy is below potential and sluggish growth in the euro area weigh on the perspectives of the export sector.
"As a result, an expansionary monetary policy seems adequate and the Swiss National Bank (SNB) shouldn’t wait further to implement it decisively," says Junius.
J. Safra Sarasin revised its policy rate forecast and now expects a rate cut by 50 basis points rate cut instead of 25bp in December.
Economists at the private Swiss bank expect two rate cuts by 25bp to a terminal level of 0% in March and June 2025.
"We wouldn’t exclude negative rates afterwards but consider the hurdle as high. In principle, the SNB could also use FX interventions to lower the value of the Swiss franc and to prevent imported deflation. Currently, however, we do not see a clear and sizable overvaluation of the franc," says Junius.
SNB President Schlegel recently warned that negative interest rates cannot be ruled out.
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