What to Make of The Swiss CPI

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Despite being the start of a new semester, it’s been a pretty quiet week on the economic calendar for Switzerland. The only major data we have scheduled is tomorrow’s CPI data. After that, the Swissie will be left to its own devices for another week.

The SNB has been fighting a combination of a strengthening currency and low inflation for a few months now, despite having record low interest rates. This is a very difficult situation for a central bank in the best of times.

But, with the country’s neighbors and largest trade partners struggling to make economic headwind, it’s been even worse for Swiss regulators.

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A Golden Opportunity

Another factor plaguing the franc is global uncertainty. This has pushed the price of gold higher, as we speculated back in October. Since the end of May, the price of gold has appreciated well over 10%.

About 25% of the franc’s reserves are based in gold, putting increased upward pressure on the currency. The central bank is quite desperate to get the price down in order to encourage exports, aid inflation and give them some monetary policy breathing room.

The Economy Isn’t Cooperating

The combination of these factors is why the SNB is biased towards a hike even as most major central banks are looking to become more accommodative. This will further increase the interest rate differential between the economies and up demand for the franc.

The inflation rate peaked at 1.2% annualize way back in September of last year, and has since been tracking lower. We got the results of one of the key drivers of the CPI earlier this week, retail sales. Last month retail sales were expected to be negative but plummeted well beyond what analysts were expecting.

The Inflation Expectations

With this poor performance in retail sales, plus tracking the performance of the currency in regards to imports, there isn’t much to justify a strong showing in the inflation department.

The consensus is for CPI on a monthly basis to slip back into negative at -0.2% compared to the +0.3% in May. This would take the annualized rate to just 0.4%, compared to the 0.6% prior and far away from the SNB targets.

In the last policy statement, the central bank said it was expecting inflation for this year to be at 0.6%. In another economy, if the inflation rate was drifting below expectations, this might raise the possibility of a rate cut.

But, with the sight deposit rate already so low, the bank is more concerned with protecting the financial industry which is having trouble in the low interest rate environment.

What About the Markets?

This wouldn’t be the first time that inflation dropped into the negative in recent months. In fact, at the beginning of the year, it stayed pretty stubbornly at -0.3%. We wouldn’t expect too much of a market reaction unless the inflation rate broke below that level.

While the SNB is not expected to cut rates, if deflation gets out of hand, maybe they’ll look into some unconventional method. On the upside, it might be encouraging if the inflation rate came in at least positive. If it were to surprise everyone and beat last month’s number, then we could see some substantial strengthening in the franc.

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