MARKET NEWS

BY  Bastian Benrath-Wright

(Bloomberg) -- Swiss inflation unexpectedly accelerated, a reading that will be welcomed by policymakers mulling whether to reintroduce negative interest rates.

Consumer prices rose 0.2% from a year ago in July, beating economist expectations for another increase of 0.1% as happened a month earlier.

Costs for hotels and car rentals rose, while those of flights, package holidays, clothing and footwear fell, the statistics agency said in a statement on Monday. A gauge excluding fresh and seasonal items as well as energy climbed 0.8%.

Switzerland’s weak inflation reflects the strength of the franc, which has made imports so cheap that the foreign contribution to prices has already been negative for several months. That led the Swiss National Bank to cut rates to zero in June.

While officials have expressed some qualms on going below zero, a sizeable minority of economists surveyed by Bloomberg expect the SNB to cut rates below zero within the year, possibly as soon as the next policy meeting in September.

The prospect of such a step increased last week, when the US announced that Switzerland’s imports will be charged 39% tariffs as of Aug. 7. Bloomberg Economics estimates that this represents a shock of around 23 percentage points for the Swiss economy, putting roughly 1% of its GDP at risk over the medium term.

What Bloomberg Economics Says...

“The SNB is unlikely to take comfort in this reading and will probably stay cautious about the franc’s movements in the months ahead. We still expect it to cut rates later this year, to negative territory, depending on the outlook for the currency, although a cut in September now seems less likely.”

—Jean Dalbard, economist. For full React, click here

Consumer-price growth in the surrounding euro area remains significantly stronger than in Switzerland and came in at 2% in July. Based on the European Union’s harmonized measure, Swiss prices rose 0.1% in the period.

--With assistance from Harumi Ichikura, Joel Rinneby and Mark Evans.

(Updates with Bloomberg Economics after sixth paragraph)