On Thursday, the Swiss National Bank (SNB) lowered its key interest rate by 25 basis points, bringing it down to zero percent. This move has raised fears that negative interest rates could return.
The rate cut was expected by the market, with an 81% chance priced in for a 0.25% reduction and a smaller chance of a bigger cut.
Inflation Pressures Ease, Prompting Rate Cut
The SNB said inflation pressures have eased since the last quarter, prompting a more relaxed monetary policy. The central bank stressed its goal to keep inflation stable over the medium term.
Switzerland is facing deflation, as consumer prices dropped 0.1% annually in May.
SNB Chairman Martin Schlegel told CNBC that short-term negative inflation numbers do not justify cutting rates below zero now. He emphasized the bank’s focus on the medium-term outlook.
The Swiss franc’s role as a safe-haven currency has pushed down prices of imported goods, contributing to low inflation. Recent market volatility has made the franc stronger, creating challenges for the SNB.
Charlotte de Montpellier, senior economist at ING, explained that Switzerland’s open economy and heavy reliance on imports mean the strong franc plays a big role in keeping inflation low.
To manage this, the SNB plans to keep its rates lower than those in other countries, aiming to slow the franc’s appreciation.
Risks and Possibilities of Negative Interest Rates
Economists like Adrian Prettejohn of Capital Economics predict the SNB may cut rates further to -0.25% this year, and possibly down to -0.75%, similar to levels seen in the 2010s, if inflation stays low.
However, SNB Chairman Schlegel warned that moving into negative rates is a serious decision. It comes with challenges and risks, requiring careful consideration.
Negative rates can encourage borrowing and investment by making money cheaper, but they also hurt savers and banks. This may reduce bank profits and threaten financial stability.
ING’s de Montpellier added that long-term negative rates could distort markets, squeeze bank margins, and raise concerns about financial stability.
After the rate cut, the Swiss franc strengthened, while the U.S. dollar held steady against it.
The SNB will make its next interest rate decision in September. The future path of rates remains uncertain.
