MNI SNB WATCH: Cut To Zero As Trade Disputes Cloud Outlook

The Swiss National Bank cut its key policy rate by 25 basis points to 0% on Thursday, as inflationary pressures across the economy decreased compared to the previous quarter. (See MNI SNB WATCH: Back To Zero As Inflation Turns Negative )

"We took heightened downside risks into account with our interest rate cut in March - and these downside risks have since materialised," President Martin Schlegel said following the decision.

The SNB's Board said it will "continue monitoring the situation closely and adjust its monetary policy if necessary, to ensure  that inflation remains within the range consistent with price stability over the medium term." Inflation has declined further since the last monetary policy assessment, slowing from 0.3% in February year-on-year to −0.1% in May. 

Despite acknowledging that the SNB would act if necessary, Schlegel appeared to put a higher bar than previously to cutting rates below zero, noting policymakers "are also aware that negative interest can have undesirable side-effects and presents challenges for many economic agents".

There was little change in the SNB's medium term projections, and inflation sits within the range of price stability over the entire forecast horizon, putting average annual inflation at 0.2% for 2025, 0.5% for 2026 and 0.7% for 2027 (cf. table). According to the SNB, the forecast is based on the assumption that the policy rate is 0% over the entire forecast horizon and without the latest rate cut, the forecast would have been lower.

The deterioration in the outlook for coming quarters is a result of increased trade tensions, with an anticipation "that growth in the global economy will weaken over
the coming quarters,” the SNB said.

Higher U.S. import tariffs are likely to curb global trade and lead to a loss of purchasing power for U.S. consumers, it said.

The trade spats are likely to lead to higher inflation in the U.S. over the coming quarters, "but in Europe, by contrast, a further decrease in inflationary pressure is to be expected," Schlegel said.