News & Analysis

On an aggregate basis, inflation seemingly disappeared in Switzerland in March, just as underlying measures suggested the pace of price growth was reaccelerating and momentum would likely be sustained after the Swiss National Bank decided to cut rates last month. While the data goes some way in validating the SNB’s decision to cut, we think it holds little bearing over the SNB’s future rate path.

Headline CPI last month fell from 1.2% to just 1.0% YoY. This not only undershot consensus expectations of a moderate increase to 1.3%, but also led the Q1 average rate to marginally undershoot the Swiss National Bank’s March forecast of 1.2% with a reading of 1.164% on an unrounded basis. On a monthly basis, headline inflation essentially flatlined, growing just 0.031% unrounded. A similar story was also visible in the core measure. Landing at just 0.088% on a month-on-month basis, the annual rate of core inflation fell from 1.1% to match the headline reading at 1.0%, undershooting consensus expectations by 0.2pp as a result. While the aggregate measures suggest inflation conditions in Switzerland have cooled significantly, the details of the report are much firmer.

The bulk of the disinflationary drag in March stemmed from just two product groups; food, which subtracted 0.05% from the headline inflation on a month-on-month basis, and restaurants and hotels, which subtracted 0.146%.

More specifically, disinflation was largely concentrated in the highly volatile supplementary accommodation component within the restaurants and hotels category, which last month fell 19.6% MoM to subtract 0.149% from headline inflation, more than reversing its large contribution to last month’s 0.6% reading. On the contrary, contributions to overall inflation were fairly diverse in March, ranging from package holidays, to recreation and clothing, all of which reflect to some degree strong levels of discretionary spending. Furthermore, inflation was also visible in restaurants, where prices rose 0.2% on the month to contribute 0.014% to the headline reading.

Inflation pressures in Switzerland were greater than the aggregate measures suggest, primarily due to the anomalous drag from supplementary accommodation 

While the strength of discretionary spending on inflation isn’t necessarily visible in the domestic, services, and core sub-aggregate measures due to the inclusion of supplementary accommodation in those measures, the component-level signals suggest to us that risks are still skewed towards a reacceleration in inflation moving into the middle of the year, especially as the effects of looser monetary policy filter through into the economy.

This leads us to believe that the SNB’s easing path remains data-dependent, even as today’s considerably weaker headline and core inflation readings suggests the Bank should be on a sustained easing path from here. Nevertheless, with markets now turning to the franc as a primary funding currency given the lower rates and the SNB’s intolerance towards the currency strengthening, today’s data does little to disrupt short CHF positions. That said, we remain sceptical that the franc can depreciate much further from here over the coming months as a sharp return to parity on EURCHF adds upside risks to incoming inflation readings, undermining the view that the SNB will continue cutting that underpins the short CHF bias.

EURCHF continues to rally after Swiss inflation misses expectations, but we think upside is limited from here

 

 

Authors: 
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst

 

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