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The Swiss National Bank has cut interest rates to zero but did not go so far as negative rates, as it battles to restrain its currency, which has surged on global trade tensions.
The quarter-point reduction on Thursday by the central bank’s governing board was anticipated by economists.
It is the first time that the Alpine country, which is one of the few globally to experiment with negative rates, has gone to an interest rate of zero as it tackles lagging inflation and a surging Swiss franc, a haven currency that investors have bought up amid US President Donald Trump’s trade war.
The Swiss franc strengthened after Thursday’s expected cut, putting it flat on the day against the dollar, with the greenback at SFr0.819.
The decision comes after annual inflation dipped to minus 0.1 per cent in May, the first negative reading in four years. The appreciating Swiss franc — up 10 per cent against the dollar this year — has slashed the cost of imports, intensifying disinflationary pressure.
The so-called Swissie’s sharp rise this year has complicated policymaking. The SNB is attempting to ease pressure without triggering accusations of currency manipulation from the US, which placed Switzerland on a watchlist during Trump’s first term.
Analysts say rate cuts are a diplomatically safer route than direct FX intervention.
“[The central bank] anticipates that growth in the global economy will weaken over the coming quarters,” said the SNB in a statement alongside Thursday’s decision. “Inflation in the US is likely to rise over the coming quarters. In Europe, by contrast, a further decrease in inflationary pressure is to be expected.
“Inflationary pressure has decreased compared to the previous quarter. With today’s easing of monetary policy, the SNB is countering the lower inflationary pressure,” it added.
Analysts at Capital Economics highlighted that there was no change in the statement’s language regarding FX interventions and no mention of the franc’s strength. “This supports our view that the SNB is not planning to use FX interventions as its main tool for loosening monetary policy anytime soon,” they added.
Switzerland first introduced negative interest rates in December 2014, when the SNB set the deposit rate at minus 0.25 per cent to stem the franc’s appreciation amid safe-haven inflows.
The central bank at one stage pushed the rate down to minus 0.75 per cent, the lowest level in the world. The policy remained in place for more than seven years, also making it one of the world’s longest negative rate periods until it exited it in 2022.
Thursday’s cut creates a potentially tricky situation for Swiss banks. They no longer earn interest on their reserves with the SNB but theoretically have less justification to pass that cost on to customers.
This is a developing story
