Investing.com -- UBS has revised its forecast for the Swiss National Bank (SNB) policy rate, expecting a reduction to 0.0% at the upcoming June meeting, a decrease from the current rate of 0.25%. This adjustment is in response to several factors that are influencing the Swiss economy, including lower inflation expectations and changes in global economic conditions.
The Swiss franc’s appreciation and a significant drop in Brent oil prices, which have fallen by 14% since the tariff announcement, are expected to decrease the inflation rate by nearly 0.2 percentage points. UBS projects that inflation could fall to 0.0% year-over-year or slightly below in April and May, down from the current 0.3% year-over-year. This decrease in oil prices, combined with the stronger franc, is contributing to the reduced inflation forecast.
UBS also slightly lowered its 2025 inflation forecast for Switzerland to 0.2% from the previous estimate of 0.4%. The expected slowdown in both global and Swiss economic growth is likely to further diminish the medium-term inflation outlook.
The potential for a policy rate cut is heightened by various risks, including the possibility of re-escalated trade tensions, the tariffs’ impact on global economic growth, and the likelihood of a recession. Additionally, a substantial easing of monetary policy by the European Central Bank (ECB) could increase the pressure on the Swiss franc to appreciate. If these scenarios unfold, UBS suggests that the SNB might consider reducing its policy rate into negative territory.
Conversely, UBS notes that trade agreements between the United States and its economic partners, along with a rapid depreciation of the Swiss franc, could lessen the necessity for a rate cut in June. UBS also does not dismiss the possibility of opportunistic foreign exchange interventions given the current financial market conditions and low inflation rates.
The strength of the Swiss franc against the euro is of particular concern, as it is now considered overvalued, especially since the euro was already undervalued against the franc before its recent appreciation. In contrast, the US dollar remains expensive against the franc, with the USDCHF still above UBS’s fair value estimate of 0.78.
Considering Switzerland’s closer economic ties with the Eurozone compared to the US, the franc’s valuation against the euro is a more pressing issue.
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