[ZURICH] The Swiss National Bank (SNB) cut its interest rate to zero, seeking to deter investors from pushing up the franc.
The quarter-point reduction on Thursday (Jun 19) is the sixth consecutive move by officials, and was forecast by most of the economists surveyed by Bloomberg after the currency’s strength caused consumer prices to drop for the first time in four years. A minority anticipated an even bigger half-point step.
“With today’s easing of monetary policy, the SNB is countering the lower inflationary pressure,” the central bank said in a statement. “The SNB will continue to monitor the situation closely and adjust its monetary policy if necessary” it said, adding that it “remains willing to be active in the foreign exchange market as necessary.”
The cut underscores just how far US President Donald Trump’s disruption to global trade is impacting Switzerland. SNB president Martin Schlegel and colleagues had signalled as recently as March that they were probably finished with easing, but the currency’s role as a haven from turmoil forced their hand.
The Swiss franc rose as much as 0.2 per cent to the day’s high of 0.9387 versus the euro after the announcement. Since April, the haven currency has traded in range of a decade high around 0.92, benefiting from demand induced by the broad sell-off in the US dollar. Against a basket of currencies, the franc has gained nearly 2 per cent so far this year.
Investor alarm at the impact of US policies prompted such inflows in the past quarter that the franc touched a decade-high against the US dollar, pushing the inflation rate below below zero for the first time since early 2021.
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The Swiss move contrasts with the wait-and-see approach taken by most global peers. On Wednesday, the Federal Reserve kept its rate unchanged, and the Bank of England may do so too later on Thursday. Officials at the European Central Bank have signalled a pause for now after a series of reductions.
By going as low as zero, SNB officials are not only ending more than 2½ years of positive rates, but also settting the lowest benchmark of any major central bank.
They are also experimenting with a specific level that the central bank never tested when it adopted negative borrowing costs, neither on the way down, nor going up again. That will challenge Swiss banks, as it eliminates income from deposits while also compressing margins on loans and mortgages.
If pressure on the franc persists, officials have the option of going below zero, which the SNB already did from 2014 to 2022. Schlegel has said that “no one likes” such a measure but that policymakers are ready to do so if needed. A minority of economists reckon such a move could transpire as soon as this year.
Schlegel on Thursday acknowledged that the rate move brings borrowing costs “to the verge of negative territory.”
“We are also aware that negative interest rates do have undesirable side-effects and presents challenges for many economic agents,” he said.
Economists at ODDO BHF said that they see a high probability of another 25 basis point cut in September.
Such a “return of negative rates aims to curb the appreciation of the Swiss franc and boost domestic credit,” they said. “The SNB is likely to reintroduce partial exemption mechanisms to protect domestic banks, while having a more direct impact on foreign capital flows.”
Swiss stocks fell as much as 1.1 per cent on Thursday. While lower rates are supportive for exporters, a strong franc, zero rates and a flat yield curve tend to be a headwind for banks and financials stocks, which make up about a fifth of the market benchmark.
The other way to weaken the franc would be to restart currency interventions, but that brings risks of its own. The US branded the Swiss a manipulator during Trump’s first term, and earlier this month, the Treasury added Switzerland to a list of economies subject to monitoring for exchange-rate policies.
SNB officials have said that they will use the tool if necessary, but shirked from large-scale market action for all of last year.
For now, one source of relief for the central bank may come from the increase in crude oil costs after hostilities erupted between Israel and Iran.
Even so, its outlook still points to weak consumer-price pressures that are likely to keep officials concerned. On Thursday, they lowered their forecast for inflation this year, expecting it to average 0.2 per cent in 2025, 0.5 per cent in 2026 and 0.7 per cent in 2027, after it was previously seen at 0.4 per cent, 0.8 per cent and 0.8 per cent, respectively.
Against some expectations they kept intact their outlook for Switzerland’s economy despite US tariffs. After the strongest expansion in two years last quarter due to front-loading of exports, the SNB still expects growth in a range of 1 per cent-1.5 per cent this year. Earlier this week, the government published a forecast for 1.3 per cent.
Another topic of interest could be the SNB’s decision to maintain its system of remunerating reserves, in which it pays banks full interest only on deposits up to a institution-specific limit.
For parked cash above that, lenders get the policy rate minus 25 basis points, which means that there’s now negative interest on such excess reserves. BLOOMBERG
