Why the period of destructive charges can return

There was a popular theory among central bankers coming out of the post-covid inflation shock: That the world had changed.

The overwhelming line of thought is that we would never get back to ZIRP or negative interest rates and that the neutral rate was higher. I’ve yet to hear a compelling reason for why that is, particularly in a world that’s about to be disrupted by AI.

Yes, there’s the deglobalization talk but that’s vastly overstated and I don’t find any demographic arguments compelling. In July, I argued that it was time to buy bonds because of all this and they then embarked on a major rally. Now most of that has come undone on fiscal worries ahead of the election but everything since then has highlighted falling inflation.

Some of the strongest evidence this week came from Switzerland, where year-over-year inflation fell to +0.60%. Back in September, the SNB slashed its inflation forecast for 2025 to 0.6% from 1.1% as it cut rates. This year’s inflation was also trimmed to 1.2% from 1.3%.

In light of today’s data, that’s looking far too high. The next meeting is December 12 so much can change (particularly energy prices and FX) but rates are at 1.00% and a 50 basis cut is on the table and I’d argue it’s advisable. Market pricing is still only 28% but by March, pricing is down to +0.30%.

Deutsche Bank argues that the the
odds of negative rates are rising again. They also highlight scenarios where we get trade frictions and I can see risk off scenarios where the franc rises materially.

It’s also not just Switzerland as Europe is struggling more broadly and DB argues that inflation isn’t a problem.

“Despite this week’s small upside inflation
surprise in the Eurozone, it is hard to see broader Euro-area inflation forces
as anything but disinflationary given the very soft inflation numbers coming in
throughout the smaller European economies recently (Sweden, Norway, and today
Switzerland).”

The one place with still-strong growth is the USA but if we end up with some fiscal tightening coming out of the election, then it could also see lower inflation. At some point, growth will also hit a bump and given what we’re seeing globally, we could easily be tipped back into a world of very low, or negative rates again.