Swiss Inflation Drops to Three-Year Low, Opening Door for Further Rate Cuts

ZURICH (Reuters) – Swiss inflation has dropped to its lowest level in over three years, according to government data released on Thursday, leading analysts to predict that further interest rate cuts by the Swiss National Bank (SNB) are highly likely.

Consumer prices in Switzerland increased by just 0.8% in September compared to the same month the previous year, marking the slowest rate since July 2021, as reported by the Federal Statistics Office. Month-on-month prices fell by 0.3%, attributed to declining costs for petrol, housing, and holidays.

In response to this sluggish inflation, the SNB recently reduced interest rates to 1.0%, marking its third cut of the year, with indications that additional reductions may occur soon. The new chairman of the central bank, Martin Schlegel, has emphasized the importance of maintaining price stability, aiming to keep inflation within a target range of 0-2%. He noted that the risks surrounding inflation are now skewed more toward the downside.

During his first public address since taking the helm, Schlegel mentioned that the SNB is considering the possibility of reducing interest rates to negative levels.

Market predictions show an 82% likelihood of a 25 basis point cut at the SNB’s upcoming meeting in December, while there’s an 18% chance of a more significant 50 basis point reduction.

Karsten Junius, chief economist at J.Safra Sarasin, pointed out that inflation dynamics in Switzerland remain "alarmingly weak," with cheap imports contributing to the situation and domestic inflation primarily driven by rising rents. He remarked, "Today’s figures indicate that interest rate cuts by the SNB are still necessary," forecasting a 25 basis point cut in December and potentially more to come.

Junius also suggested that another cut in March seems highly probable, with a risk that the SNB may need to lower rates further by June of next year.

GianLuigi Mandruzzato, an economist at EFG Bank, stated that the low inflation environment enhances the likelihood of a 50 basis point rate cut in December. While he expects a 25 basis point reduction, he acknowledged that a 50 basis point cut cannot be ruled out. He added, "The odds that the SNB policy rate will reach a low of 0.50% in the first half of 2025 are clearly increasing."