MNI SNB WATCH: Back To Zero As Inflation Turns Negative

With inflation below the Swiss National Bank's already lowered-March forecasts, policymakers are set to further ease policy on Thursday, cutting the policy rate by 25 or even by 50 basis points to zero or lower.

Having eased steadily since spring 2024, the SNB’s main policy rate is already at 0.25%, seemingly leaving its board with only limited room to act, though President Martin Schlegel has made it clear policymakers will cut back into negative territory after a near-three-year hiatus if necessary. 

"A 25-basis point in the policy rate seems the most likely outcome of the next SNB meeting and it seems the most appropriate given the uncertain scenario," EFG Bank's Gianluigi Mandruzzato told MNI, noting the decline in annual headline inflation to -0.1% in May.

For now, it seems most likely that the SNB is prepared to take rates back to 0% and keep some room for manoeuvre in future, if needed. The latest round of forecasts is expected to include another lower number for inflation, at least for the near term, though many analysts now see the SNB as more focussed on the medium-term outlook.

"The possibility of rates being taken into negative territory and of currency interventions remains on the table, and depends on the evolution of trade negotiations with the U.S., the intensity of fiscal stimulus in the euro area, and the strength of the Swiss franc in the coming weeks," Mandruzzato added.

The currency strength of recent months is a concern and will weigh on inflationary pressures. But as trade talks with the U.S. continue, Washington's recent decision to again name Switzerland as a currency manipulator could make life difficult for the SNB. However, the risk of a prolonged period of negative, below-target inflation would likely force it to adopt measures that would not not welcomed by the Swiss public, such as negative rates and currency intervention.