Switzerland Officially Enters Zero Interest Rate Era to Cope with Continuous Appreciation Pressure of Swiss Franc

On Thursday local time, the Swiss National Bank (SNB) announced a 25-basis-point cut in its policy interest rate to 0%, in response to declining inflation, upward pressure on the Swiss franc, and economic uncertainties stemming from US trade policies.

This marks the sixth interest rate cut by the SNB since it initiated an easing cycle in March 2024, bringing Switzerland to the brink of a negative interest rate policy.

In its latest statement, the SNB said, "Inflationary pressures have eased compared to the previous quarter. With today's easing of monetary policy, the SNB is responding to these lower inflationary pressures."

"The SNB will continue to closely monitor the situation and adjust its monetary policy as necessary to ensure that inflation remains within a range consistent with price stability over the medium term," the bank added.

Prior to this rate cut, Switzerland's annual inflation rate turned negative (-0.1%) in May for the first time in four years, falling outside the SNB's target range of 0-2%. This means that while most countries are grappling with inflation, Switzerland is facing deflation.

However, deflation is not uncommon in Switzerland, having occurred in both the 2010s and 2020s, with the strength of the Swiss franc being a major factor driving this trend.

In its baseline scenario, the SNB expects global economic growth to slow down in the coming quarters, while inflation in the US is set to rise and inflationary pressures in Europe will decline further.

The SNB emphasized that the global economic outlook remains highly uncertain, with the possibility of further increases in trade barriers leading to a further slowdown in global economic growth, though it cannot be ruled out that fiscal policy support for economic growth may exceed expectations.

As the SNB cuts interest rates, central banks around the world are busy, with Norway's central bank unexpectedly announcing its first rate cut in five years and the Bank of England set to make its interest rate decision later.

UBS economist Alessandro Bee commented, "The SNB's rate cut is due to the continuous strengthening of the Swiss franc, and Switzerland's economic outlook has become more fragile following the 'Liberation Day' tariffs. The SNB hopes to prevent further appreciation of the Swiss franc, which could help Swiss exporters and also prevent further declines in inflation."

Notably, the Swiss franc has appreciated by about 11% against the US dollar so far this year, as investors seek safe havens. This has made imported goods cheaper, contributing to the decline in inflation.

Charlotte de Montpellier, senior economist at ING, claimed, "As a safe-haven currency, the Swiss franc tends to appreciate when global markets are under pressure, systematically pushing down the prices of imported products."Switzerland is a small and open economy, with imports accounting for a significant portion of CPI inflation."

Amid high global economic uncertainty, the Swiss franc has continued to strengthen in recent months, and the market generally expects it to continue doing so, indicating ongoing challenges for the Swiss National Bank.

The Swiss National Bank has stated that it will intervene in the foreign exchange market if necessary to keep inflation on track. However, two weeks ago, the US placed Switzerland on a watch list of countries subject to monitoring for unfair currency and trade practices.