Swiss National Bank board member Petra Tschudin commented on the inflation data in Switzerland, highlighting that it has dropped to the lowest level since COVID. Consumer prices fell by 0.1% year-on-year in May. Despite this, the bank is focused on its medium-term goals. Currently, markets predict there is a 70% chance the SNB will reduce the interest rate by 25 basis points at the meeting on June 19, bringing the rate down from 0.25% to zero. There’s also a 30% chance of a return to a negative rate of -0.25%. The recent drop in inflation is mainly due to the strong Swiss franc, which has affected the prices of imported goods.

SNB Leadership’s Perspective

SNB Chair Martin Schlegel pointed out that occasional negative data is to be expected. He noted that one weak month doesn’t always mean the bank needs to react immediately. What we see now shows that policymakers are taking their time to understand the recent changes in prices. The decrease in consumer prices was anticipated due to foreign exchange fluctuations and has highlighted the issue of imported inflation. While a strong franc helps lower costs for goods from abroad, it also affects domestic prices, leading to lower overall inflation without suggesting weak demand within the country. Tschudin’s comments support the idea that long-term targets are more important than monthly changes. Small drops like the one in May don’t require sudden shifts, especially since changes in inflation can reverse quickly. Instead, they emphasize a steady approach—maintaining confidence in medium-term inflation expectations is more important than reacting to short-term numbers. From a trading perspective, the money markets have reacted strongly. The likelihood of a slight rate cut shows that investors believe the SNB remains supportive of easing, as long as the data continues to be subdued. The 30% chance of moving to a negative rate is also significant. There’s some expectation—although not universal—that the SNB may return to negative rates if disinflation continues.

Implications for Future Policy

Schlegel adopted a cautious tone, reminding us not to base policy expectations solely on one weak data point. This suggests that the bank prefers to wait for trends before taking action. It implies that the upcoming decision may stick to the expected plan unless there’s a consistent trend of weak data. One poor month doesn’t create a pattern, and policy won’t shift based only on eye-catching statistics. Looking ahead to the next two weeks, we expect volatility to increase around the policy meeting, especially if forward guidance suggests more than just a one-time adjustment. For those managing risk, it would be wise to consider scenarios where Swiss rates might test lower levels again. While the range of possible outcomes has slightly widened, the central expectation remains a quarter-point cut. Given the SNB’s careful approach and their tendency to hint at future moves, the market will closely analyze their language more than the decision itself. Attention should focus on how they describe inflation drivers, whether they mention energy or exchange rate effects, and their outlook for their persistence. This language will quickly influence future pricing, and changes can happen faster than expected. We should be prepared to adjust our views once their assessment tone and details are clearer. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now