Deflation is back in Switzerland

While most developed economies continue to grapple with sticky inflation, Switzerland is actually seeing consumer prices shrink. As a result, some observers see a return to negative interest rate policies as a distinct possibility.

As our chart shows, Swiss headline inflation was most recently negative during the worst of the pandemic, following a sustained bout of deflation in the mid-2010s. In May of this year, headline CPI fell by 0.1% year-on-year -- slipping below the Swiss National Bank’s target range of 0–2%. (Core inflation eased but remained in positive territory, running at 0.5%.)

The Swiss franc's unique status as a safe-haven currency is driving this phenomenon. It's been stronger than parity against the euro for several years, and touched a record above 1.08 euros in April. (It's been especially strong against the US dollar in the wake of Donald Trump's tariff moves.)

That's been tough on exporters, but also means it's been much cheaper for the Swiss to import goods from the surrounding single currency zone. To illustrate this effect on inflation, the bars in our chart break down "domestic" and "foreign" contributions to consumer prices. While "domestic" Swiss inflation has been sticky since 2022, it's been easing; May figures show how cheaper imports have now more than offset that effect -- even though foreign products account for just 23% of the CPI basket. Overall, imported inflation fell 2.4% year on year.

As a result of these trends and a desire to restrain the franc's appreciation, the SNB is widely expected to cut its key policy rate by 25 basis points to zero at its June 19 meeting.

Could the key rate go negative later this year? The SNB, which had a negative interest rate policy from 2015 to 2022, has a history of surprising global markets: it became the first major central bank to cut rates this cycle in March 2024.

As our final chart shows, Swiss 2-year yields (a key gauge of short-term policy expectations) have gone negative -- showing the markets are expecting a return to "NIRP." That would be tough on Swiss savers and banks.

We've also added a chart tracking international inflows to Swiss assets, courtesy of our partners at EPFR. The safe-haven effect is clearly visible: 2025 inflows to Swiss equity and bond funds have surpassed the recent pandemic peak of 2021, as measured on a year-to-date basis.