Swiss Inflation Outlook Clouded by US Tariffs, SNB May Lower Rates

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Switzerland's inflation rate for March remained steady at 0.3%, but this was quickly overshadowed by the unexpected 31% tariff imposed by the U.S. on Swiss goods. According to Capital Economics, these new tariffs are likely to reduce economic activity and inflation in Switzerland, increasing the chances that the Swiss National Bank (SNB) will lower its policy rate to zero in June, a shift from the previously expected rate of 0.25%.

The Consumer Price Index (CPI) inflation for March aligned with Capital Economics' forecast, although it fell short of the broader consensus expectation of 0.5%. The transport sector saw a significant decline, with inflation dropping from -1.1% in February to -2.1% in March, primarily due to lower air transport costs and reduced fuel prices. However, higher inflation in core goods and food offset this decrease.

The U.S. tariff hike, based on a new formula for calculating reciprocal trade tariffs, was a surprise and is expected to result in lower inflation for Switzerland in the medium term. The Swiss franc dropped by 1% against the U.S. dollar following the tariff announcement, but this is unlikely to have a significant impact on inflation due to the relatively small share of Swiss imports from the U.S.

Given that the U.S. accounts for a substantial 19% of Swiss exports, the economic impact of the tariffs is expected to be more significant. Capital Economics now forecasts Swiss inflation to average around 0.3% for the year, with potential risks to the 2023 projection of 0.6%.

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