Swiss inflation turns negative, raising likelihood of negative interest rates

By John Revill

ZURICH (Reuters) -Swiss inflation turned negative in May, marking the first decline in consumer prices for more than four years and adding pressure on the Swiss National Bank to cut its interest rate steeply later this month.

Consumer prices fell by 0.1% in May compared with a year earlier, according to data from the Federal Statistics Office on Tuesday, the lowest reading since March 2021 when the Swiss economy was hit by the COVID-19 crisis.

An interest rate cut by the SNB at its next meeting on June 19 is seen as a certainty by the market, which gives a 69% probability the central bank will cut rates from 0.25% at present to 0%.

Markets now give a 31% probability the SNB will cut its key interest rate to -0.25%, returning Switzerland to an era of negative interest rates which were in place from late 2014 to 2022.

The Swiss National Bank declined to comment on the data, which meant inflation fell outside its 0-2% target range.

Chairman Martin Schlegel last week said the central bank would consider the mid-term development of inflation rather than any month's data, although he has also previously said the SNB would not shy away from bringing negative rates back.

ING economist Charlotte de Montpellier, who expects a 25 basis point cut in June, and a similar cut in September, said the central bank would likely be "very annoyed" by the decline in inflation.

She said negative inflation was caused largely by the strong Swiss franc, which reduced the price of imported goods by 2.4%, as well as a big drop in energy prices.

"I think that rates will indeed go back into negative territory," said de Montpellier. She said the SNB would have to act to maintain expectations of inflation within its 0-2% target range.

"I think the SNB will want to stop at -0.25% for the rate ... but the risk is that the situation will deteriorate even further if the franc becomes even more expensive and oil prices continue to fall and that it will have to go even further negative."

Economists from UBS and EFG Bank also forecast a 25 basis point cut in June.

Rudolf Minsch, chief economist at business association economiesuisse, expects a single cut of 25 basis points in June or September and then the SNB to halt.

"If oil prices stay around the current level, we won't have any additional effects that would lead to further price reductions over the coming months. Domestic inflation is still positive," said Minsch.

"So the central bank has a bit more leeway to wait before going into negative rates."

(Reporting by John RevillEditing by Tomasz Janowski)