LIVE MARKETS-Negative rates could be coming back

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NEGATIVE RATES COULD BE COMING BACK

While the ECB signalled last week it's likely done with interest rate cuts for now, the Swiss National Bank could well be taking rates back into negative territory at its policy meeting next week, according to Capital Economics.

"As always, the SNB has given little away about its plans, so next Thursday's decision is uncertain," says Adrian Prettejohn, European economist at the consultancy.

Money market traders are fully pricing in a quarter-point move, which would take interest rates to zero, and about a 30% chance of a half-point cut to -0.25%.

"We now fall into the latter camp," Prettejohn says, "expecting rates to return to negative territory for the first time since 2022."

Prettejohn gives three key reasons for why a jumbo 50-basis point cut could be on the cards:

1/ Swiss inflation turned negative in May, marking the first decline in consumer prices since 2022

2/ Stronger Swiss franc, which is up 4% on a trade-weighted basis since the central bank's March meeting

3/ Risks are skewed to undershooting the price stability target of 0-2% inflation rather than overshooting

Looking ahead, Prettejohn doesn't expect the SNB to lower borrowing costs further after next week's announcement.

"While the risks are skewed towards further cuts, the policy space is vanishing quickly," he says.

(Samuel Indyk)

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