Swiss Franc Steady, Inflation Lower Than Expected

04/03/2023

2 minutes read

2023.04.03 09:33

MarketPulse

is unchanged in the European session, trading at 0.9150. The Swissie pushed higher earlier but has given up those gains. Switzerland’s inflation rate fell to 2.9%, down from 3.4%, and the drop could make the Swiss central bank think twice about another rate hike in June.

Swiss inflation underperforms

Swiss inflation fell to 2.9% y/y in March, down from 3.4% in February and below the estimate of 3.2%. On a monthly basis, inflation slipped to 0.2% in March, vs. 0.7% prior and 0.4% anticipated. The driver behind the drop was lower fuel costs. Switzerland’s inflation levels may be the envy of other major economies, but the Swiss National Bank (SNB) finds itself in a tough fight, given that inflation has exceeded its 0%-2% target for over a year.

The SNB has been very aggressive, relatively speaking, with its rate policy in order to contain inflation. The SNB delivered a 50-basis point hike in March, marking a fourth straight increase, bringing the cash rate to 1.5%. The rate hike helped propel the Swiss franc in March when it gained 2.5% against the US dollar.

What’s next for the SNB? The next meeting isn’t until June, and prior to the inflation release, there was a reasonable likelihood of another rate hike. The unexpected drop in CPI could complicate that decision, as policymakers will have to give thought to a 25-bp hike or even a pause in rates, as the economy is showing signs of weakness. GDP was flat in the fourth quarter, and last week’s numbers were soft. The KOF Economic Barometer fell to 98.2, down from 98.9 and below the estimate of 100.5 points. Retail sales posted a weak gain of 0.3%, better than the prior release of -1.7% but shy of the forecast of 1.9%. If inflation continues to head south, policymakers will have their excuse to ease up on the pace of rates and give the economy a break.

Weak manufacturing remains a global problem, as the Russian invasion of Ukraine and China’s zero-Covid policy disrupted supply chains and dampened demand. On Friday, Swiss manufacturing PMI dipped to 47.0 in March, down from 48.9 in February which was also the consensus forecast. US ISM Manufacturing PMI will be released later today and is expected to weaken to 47.5 in March, down from 47.7 in February.

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