Swiss National Bank cuts rate to zero, signals caution

Zurich — The Swiss National Bank cut its interest rate to zero on Thursday and did not rule out returning borrowing costs to negative territory in future, though it stressed this was not a step it would take lightly.

The SNB reduced its policy rate by 25 basis points from 0.25%, as expected by markets and a Reuters poll, to stand on the brink of negative rates for the first time since 2022.

The central bank now has the lowest borrowing costs among its peers, with markets giving a 53% probability of further cuts in September.

Chairperson Martin Schlegel stressed the negative side effects of sub-zero borrowing costs and noted that with rates now at zero, cutting rates again would be a more significant step than in other circumstances.

“As a central bank you can never exclude measures, but the hurdle is higher now,” Schlegel told reporters.

The SNB lowered its policy rate to get inflation back within its 0-2% target range, which it defines as price stability, and seeing low inflationary pressure ahead.

Negative interest rates, which the central bank last used between late 2014 and 2022, were unpopular with banks, savers and insurance companies, and the SNB indicated it would be reluctant to revive them.

“It’s very clear that negative rates would come with challenges and also side-effects,” Schlegel told Reuters. “For example, for savers, also for pension funds, and also for the real estate market. So we are well aware of the side-effects. And of course, we would not take this decision lightly.”

The Swiss franc briefly strengthened after the decision, but retreated to trade steadily on the day against the dollar at 0.8191 francs.

Thursday’s cut was the SNB’s sixth rate cut in succession and came after Swiss prices fell by 0.1% last month, its lowest reading for four years.

In its baseline scenario, the SNB has global economic growth weakening and US inflation rising in coming quarters. In Europe, it saw inflationary pressure decreasing.

The central bank said the outlook for the world economy remained subject to high uncertainty. Trade barriers could be raised further, leading to a more pronounced slowdown in the global economy, it noted.

The Swiss move comes on a busy day for central banks, with Norway’s central bank surprising markets with its first rate cut in five years, and the Bank of England kept its interest rate unchanged.

On Wednesday, the US Federal Reserve held its interest rates steady, but signalled they could fall later this year, while the European Central Bank trimmed its interest rate by 25 basis points earlier this month.

In Switzerland, the SNB also lowered its inflation forecasts for 2025, 2026 and 2027, making some analysts expect more rate cuts.

“Unless the situation changes drastically between now and September... today’s decision paves the way for a further rate cut in September and a return to negative interest rates,” said Charlotte de Montpellier, an economist at ING Bank.

Capital Economics also thought another rate cut was likely, with deflation more persistent than anticipated by policymakers.

Others, however, disagreed, with EFG senior economist GianLuigi Mandruzzato saying the SNB was likely to stop at zero, unless there was a significant downturn in the Swiss economy caused by higher US tariffs.

“All options remain on the table, including negative interest rates and foreign exchange market interventions, but for them to be deployed, a further, meaningful deterioration of the outlook would be needed,” he said.

Switzerland’s rate-sensitive two-year bond yield remained in negative territory, a sign markets still anticipate a move in Swiss rates below 0% in the months ahead.

The SNB cut rates after the franc, buoyed by safe-haven flows, has gained roughly 11% against the dollar in 2025, pushing down inflation by making imports cheaper.

The SNB says it will intervene in foreign currency markets if necessary to keep inflation on track, though two weeks ago, Washington added Switzerland to a list of countries being monitored for unfair currency and trade practices.

“The SNB’s main concern may not be avoiding the impression of being a currency manipulator — still, it is politically wise not to appear too trigger-happy to go negative with the policy rate,” said Karsten Junius, chief economist at J Safra Sarasin.

Reuters