Swiss Inflation numbers came out in line, but still deeply negative down 0.4% quarter on quarter 1.3% compared to the same period last year. Switzerland has the lowest inflation rate among developed countries as it is challenged by two major shocks, the abrupt appreciation of the franc and the collapse of the oil price.
The CHF appreciation made import goods cheaper creating dis-inflation, but Worse, prices of domestically produced goods had to adjust lower relative to foreign products. Coupled with a slower global growth, the result is a much weaker GDP.
Indeed in 2015 GDP was gravitating around 0% on average compared to a growth of 0.6 and 0.7 percent in the two quarters preceding the end of the floor rate franc. Clearly 2015 confirmed what the SNB had feared; that as an open economy Switzerland is highly sensitive to its exchange rate.
In 2016 the global context remains challenging with a slowing China, persisting low oil prices, and the normalisation of the US monetary policy.
The good news is that SNB initiatives to weaken the franc are starting to bear fruit. With negative rate exemptions having all expired; pension funds, banks and assets managers are increasingly investing abroad. Also, the perspective of further rate cuts deeper into negative territory is keeping speculators away.
Despite the market turmoil, the EUR/CHF reached a new high this year at 1.12 and has since then consolidated just below 1.10. We believe the rate could reach 1.15 by year end, and depending on how oil prices evolve, it should help bring inflation back to positive by the end of 2016 or early 2017.