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Investing.com -- Swiss inflation dipped into negative territory in May, reinforcing expectations for a policy rate cut by the Swiss National Bank (SNB) at its June 19 meeting, according to Wells Fargo (NYSE:WFC).
Headline CPI fell 0.1% year-over-year, in line with consensus, but marked the first instance of deflation since March 2021.
Core inflation slowed to 0.5%, domestic inflation to 0.6%, and services inflation to 1.1%, suggesting broader disinflationary trends without a full shift to underlying deflation.
Wells Fargo economist Nick Bennenbroek believes these figures justify a 25 basis point cut. “We now see one more 25 bps SNB rate cut, to a policy rate of 0.00%, at the June 19 meeting," he said in a note.
Market participants are pricing in more than a 100% probability of a June cut, and expectations have built for cumulative rate reductions of over 50 bps this year.
While inflation figures support easing, Switzerland’s economic resilience may limit further action. Q1 GDP rose 0.5% quarter-on-quarter, or 0.8% when adjusted for sporting events.
Exports surged 10.5% ahead of anticipated U.S. tariffs, although this was offset by a 13.1% increase in imports. Year-over-year GDP growth reached 2.0%, beating forecasts.
Sentiment data also reflected mixed but firm conditions. The KOF leading indicator – a monthly gauge that predicts Switzerland’s economic performance over the next few months – stood at 98.5 in May, consistent with 1.5% annual growth.
Meanwhile, the manufacturing PMI slipped to 42.1, while the services PMI rose to 56.3.
“Assessing recent activity and sentiment data, we see potential for the Swiss economy to continue growing near a 1.5% pace, though we acknowledge that the potential for higher U.S. tariffs poses some downside risk to that outlook,” Bennenbroek wrote.
Despite the soft inflation outlook and dovish ECB tilt, the economist sees limited room for additional easing beyond June.
“We are less persuaded by the case for further rate cuts beyond June and, at this time, do not expect the SNB to take its policy rate into negative territory," he continued.
Further cuts would likely require clear evidence of underlying deflation and a sharp economic slowdown to near-stagnant growth rates.