Switzerland's core inflation growth fell to 1.9% in May, below the SNB's 2% target

A measure of core inflation in Switzerland slowed more than expected, below the upper limit of the SNB's target, providing relief to officials trying to keep consumer prices under control. The so-called core inflation measure, which strips out volatile factors such as energy and food, fell to 1.9 per cent in May, down from 2.2 per cent in April. Overall inflation also slowed markedly, to 2.2 per cent, in line with expectations.

Overall prices rose 0.3% month-on-month in May as the cost of house rentals, holiday packages and several food items rose. Air transport, holiday home accommodation, heating oil and diesel had a downward impact. This is the last inflation data before SNB officials meet on June 22 to decide quarterly interest rates. Economists expect the SNB to raise interest rates by another 25 basis points from the current level of 1.5%.

The easing of price pressures has shifted the SNB's main concern to inflation, which is transmitted across the economy. Thomas Jordan, SNB governor, said last week that the central bank could not tolerate potential consumer price increases of more than 2 per cent for too long. "If inflation remains high for some time, then the behaviour of businesses and households in setting prices will change," he said. "But inflation is acceptable."

Officials' fears have grown after the recent rise in the benchmark for mortgage costs, which will trigger a broad rise in rents. Economists have warned that the SNB's tightening action, which has pushed up the cost of credit, could itself fuel inflation through this channel.

Switzerland's national mortgage base rate has risen for the first time ever, leaving thousands of tenants in the country's high-priced housing market exposed to rent increases, Zhitong Finance previously reported. After years of decline, the rental guidance rate rose to 1.5 percent from 1.25 percent, the Swiss Federal Housing Office said. Under Swiss law, landlords can raise rents by 3 percent if the base rate rises by 0.25 percentage points. The increase took effect last Friday as the Swiss National Bank raised borrowing costs to fight inflation. Even so, economists warn that the subsequent wave of rent increases could itself drive up consumer prices.

The quarterly base rate, introduced in 2008, is based on the average interest rate on domestic mortgages in Swiss francs. Economists expect at least one more increase in the base rate over the next two publication dates of September 1 and December 1. While rents will rise, prices in the Swiss property market are showing signs of weakness. The SNB forecasts that overall inflation will reach or exceed the upper limit of the 2% target by 2025, implying that borrowing costs will rise further.

Nonetheless, consumer price growth in Switzerland remains the slowest of any advanced economy. Inflation in Switzerland, measured by a common European Union measure, was 2.2 per cent in May, less than half the rate in the eurozone's periphery, where price pressures have so far fallen more slowly from their peaks.