Latest inflation data has been in line with expectations, showing no sign of unwelcome development in consumer prices.

The inflation rate over the past twelve months remains stable at +1.4%, in line with the SNB projections, and remain well within the 0-to-2% inflation target of the central bank. The updated SNB inflation projections today anticipate a slight reacceleration to +1.5% in Q3, followed by a return to a disinflationary trend towards 1.0% by 2026. As inflationary dynamics are consistent with the SNB’s definition of “price stability”, the SNB has no reason to maintain a restrictive monetary policy.

Recent economic indicators suggest that economic growth in Switzerland remains sluggish. Subdued expansion in the service sector and continuing contraction in the industry point to moderate expansion for the remaining of the year (1% GDP growth expected for 2024). In the manufacturing sector, the trend has been encouraging lately, as external demand, especially from Europe, gradually recovers. But GDP growth will likely remain below potential this year before reaching 1.5% in 2025.

The recent appreciation of the CHF, especially vs EUR, has likely been an additional factor prompting the SNB to act today, rather than wait for the September meeting. In particular, the resurgence of political uncertainties in Europe and France is increasing the risk of undue CHF appreciation in the coming weeks, which would negatively impact the still struggling manufacturing sector. In that sense, today’s decision is also likely intended to take the wind out of the sails of potential upward pressure on the CHF ahead of an uncertain summer in Europe. During the press conference, Thomas Jordan referred to political uncertainties in Europe as a source of uncertainty around the inflation outlook, that makes the SNB ready to be active in the foreign exchange market as necessary.

With this decision, the SNB is now likely done with the recalibration of its monetary policy. Unless unexpected developments on the growth and inflation front in the coming months, it will likely not cut rates further this year. Thomas Jordan referred to the neutral rate in Switzerland as being probably “at 0% or a little above 0%”. With today’s decision, the real CHF cash rate is now slightly below 0% (1.25% CHF rate minus 1.4% inflation = -0.15% real rate), tilting the monetary policy stance toward the accommodative side.