MNI SNB WATCH: Bar Still Set High For Return To Negative Rates

The Swiss National Bank is likely to leave interest rates unchanged at its 11 December meeting, with market focus on any communications from policymakers over their willingness to return to negative rates.

President Martin Schlegel has said many times in recent months that the bar is significantly higher for cutting interest rates when they are already at zero than when they are in positive territory - and little seems to have shifted to suggest a move away from the current 0% stance.

Economic data has been mixed overall as disappointing hard GDP data in Q3 cobining with a more upbeat tone in the latest activity surveys. GDP was down 0.5% q/q, the biggest contraction since the early days of Covid and worse than expected by economists who were already weighing the trade spat with the U.S. 

The latest PMI indicators have been encouraging, however, as was the KOF barometer published recently. According to economists, the improved outlook in Swiss business confidence reflects developments in the rest of Europe, Switzerland's main export market. 

The recently-signed Memorandum of Understanding with the U.S. regarding a reduction in tariffs on Swiss goods to 15% from the current 39% could bring a further improvement in the Swiss business cycle, though uncertainty remains over when the agreement will be implemented. This could once again lead companies to postpone investments and exports to the U.S. 

INFLATION OUTLOOK

Meanwhile, headlline inflation has been lower than expected. In September, the SNB forecast an average inflation rate of 0.4% year-on-year in Q4 2025, but the latest FSO points to an average between 0 and 0.1% yoy. Furthermore, falling oil prices and lower predicted electricity prices from January increase the risk that inflation will turn negative again in early 2026. 

Current low inflation rates largely reflect the past appreciation of the exchange rate, which stabilised in the second half of 2025, along with other factors beyond the SNB's control, including falling commodity prices. However, policymakers will be under pressure to prevent low inflation from becoming entrenched in private sector expectations. 

That said, only a large downward revision to the SNB’s conditional inflation forecast pointing to a prolonged period of very low, if not negative, inflation would probably justify the return of negative rates, given the messaging from the Board. Such a downward revision seems unlikely at the current juncture as market attach only a 25% probability to this development materialising in 2026.