Swiss March Consumer Prices Decline Most Since 1959
Swiss consumer prices dropped the most in five decades in March, highlighting the need for the central bank to fight the risk of deflation.
Prices declined 0.4 percent from a year earlier, led by a drop in oil costs, the Federal Statistics Office in Neuchatel said today. That’s the biggest decline in prices since December 1959. Economists predicted a drop of 0.1 percent after a 0.2 percent gain in February, according to the median of 12 forecasts in a Bloomberg News survey.
The Swiss National Bank will keep buying foreign currencies to weaken the franc in a bid to prevent the country from slipping into protracted period of declining prices, SNB Vice-President Philipp Hildebrand said yesterday. As the country grapples with the worst recession since 1975, the central bank predicts inflation will be negative this year and close to zero for the next two years.
“The danger of deflation will certainly be in the foreground for the next couple of years,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “We knew inflation would hit negative territory, but the surprise is how deep and fast it happened.”
The Swiss franc weakened against the euro after today’s release, later erasing losses to 1.5226 at 3:22 p.m. in Zurich. The yield on the two-year Swiss note fell three basis points to 0.57 percent. Yields move inversely to bond prices.
Oil, Transportation
The price of oil products tumbled 32 percent from a year ago and transportation costs fell 4.8 percent, the release showed. Durable goods’ prices slipped 1.7 percent. From the previous month, consumer prices were down 0.3 percent.
The 16-nation euro area may follow Switzerland and Ireland into negative inflation territory in the coming months, European Central Bank President Jean-Claude Trichet said today low cost car insurance. Inflation in the single-currency area slowed to the lowest on record in March. Ireland already saw its biggest decline in consumer prices in 13 years in February.
Cooling price growth may leave consumers with more money to spend and support household consumption. Still, a prolonged period of deflation may have the opposite effect as consumers put off spending to wait for lower prices. Rising unemployment may also curtail spending.
Impact on Wages
“The recession is going to intensify in the coming months and have a negative impact on wages” and spending, said David Marmet, an economist at Zuercher Kantonalbank in Zurich. “The current environment is pointing to negative inflation rates,”
To stem the recession and avoid a prolonged period of deflation, the SNB has cut its benchmark interest rate to near zero, purchased corporate bonds and bought foreign currencies to weaken the franc.
The SNB began buying foreign currencies on March 12, helping to push the franc down against the euro. Before the move, the franc had appreciated 8 percent in six months, neutralizing interest-rate cuts and weighing on exports. At the same time, a stronger franc helped push down inflation by making imports more affordable.
“We would have been in danger of a deflationary spiral had the SNB not acted,” Marmet said. “The measures they’ve taken should prevent it.”