• Swiss inflation declined by 0.1% month-to-month in November. This was unchanged from October and matched the market estimate.
• This is the fourth straight month that inflation has failed to show a gain.
• On an annual basis, inflation climbed 0.7%, up from 0.6% in October but shy of the market estimate of 0.8%.

Will Swiss National Bank Chop Rates by 50 Basis Points? 

The inflation report comes just days before the Swiss National Bank’s (SNB) next meeting on Dec. 12 and has raised expectations of a 50-basis point (bp) rate cut. The markets are currently pricing in the probability of a 50-bp cut at 71% and a 25-bp cut at 29%. The markets had recently been leaning towards a 25 bp move. Today’s inflation report indicates that risks are now on the lower side and the central bank could respond by chopping rates with an oversized 50-bp rate cut.

The central bank is well into its easing cycle and has reduced rates by 25-bp three times this year, bringing the cash rate to an even 1%. Inflation has been very low in Switzerland compared to the eurozone or the UK, but the SNB has been hawkish and careful to keep inflation within its target range of between 0% and 2%.

SNB Governor Martin Schlegel recently stated that the central bank would reintroduce negative interest rates if necessary, although he acknowledged that “the SNB does not love negative rates”. The SNB has used negative rates in the past in order to lower the value of Swiss Franc and make Swiss exports less expensive. The Trump election victory has intensified political and economic uncertainty, which could push the safe-haven Swiss Franc higher, putting pressure on the SNB to continue cutting rates.

Aside from interest rate moves, the central bank can also use foreign exchange interventions in order to keep the Swiss Franc at desirable levels and prevent deflation. The Swiss Franc has declined around 5% against the US Dollar since the start of October, lowering expectations of a currency intervention.

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Swiss Franc Steady, Stock Market Slightly Higher 

The Swiss Franc is showing limited movement in the aftermath of today’s inflation report. The USD/CHF currency pair is currently trading at 0.8843, down 0.14% on the day. The CHF/JPY currency pair and EUR/CHF currency pair are also showing limited movement.

The Swiss market index is showing small gains, up 27 points (0.24%) at 11.858.

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