By Ed Frankl
Switzerland's central bank cut interest rates to zero as it hopes to rein in the rapidly appreciating franc, which has acted as a safe haven for investors given raised concerns over U.S. trade policy and Middle East tensions.
The Swiss National Bank cut its key rate to 0% from 0.25% on Thursday. It was the sixth cut in as many meetings, from 1.75% in March 2024. Investors had mostly expected the decision.
The move brings the key rate close to a return to negative territory, where it settled for almost eight years until September 2022.
Switzerland faces a unique problem, since it is viewed by investors as a safe place to park their capital when the rest of the world appears to have become a riskier place. The Swiss franc first strengthened in response to the uncertainty created by President Trump's tariff policies, and has again appreciated over recent days following Israel's attack on Iran.
Overall, the currency has gained more than 10% against the U.S. dollar in the year to date. Those gains have lowered the prices of imported goods and services, and the annual rate of inflation fell below zero in May for the first time since 2021. The SNB's target is to keep prices rising, but by no more than 2%.
In addition to its effect on prices, the stronger currency also makes it more difficult for Swiss businesses, including watchmakers, to sell their products overseas.
The franc gained ground against the dollar after the announcement.
While SNB's Chairman Martin Schlegel had said that sub-zero rates were unpopular, including among staff at the central bank, he has refused to rule them out.
"The low-inflation backdrop, ongoing trade and geopolitical uncertainty tilt the balance of risks toward additional easing later this year," BNP Paribas Europe Economist Dani Stoilova said.
Additional cuts are most likely to materialize on the back of either an escalation in trade tensions or a breakdown in domestic demand, she added.
The SNB trimmed its forecasts for inflation for 2025 as a whole, to 0.2% from 0.4% in previous projections in March. The bank said the rate cut would counter the lower inflationary pressure.
Nevertheless, the SNB held its economic growth prediction at a 1.0%-1.5% ballpark range. The Swiss economy expanded at a fast clip in the first quarter, with gross domestic product growing 0.8%. However, that was mainly down to exports to the U.S. that were brought forward.
"When adjusted for these effects, growth momentum was more moderate," the SNB said.
"The economic outlook for Switzerland remains uncertain. Developments abroad continue to represent the main risk," it added.
The decision of the SNB to cut its rates contrasts with the Federal Reserve's choice to stand pat, with policymakers there concerned over the impact of the Trump administration's tariff policy on inflation. The Bank of England is also expected to keep its key policy rate on hold later Thursday. Sweden's Riksbank cut its key rate Wednesday by a quarter point.
Should the SNB not want to send rates into negative territory, it could intervene in foreign-exchange markets by selling the franc and buying foreign currencies. In its accompanying statement to the rate decision, the bank reinforced that it remains willing to be active in foreign exchange markets.
"Switzerland is a provider of a reserve currency, but because it offers to the rest of the world a very small amount of assets in which to invest, ends up in a constant appreciation of the currency which they are forced to counteract with FX intervention and negative interest rates," said Gilles Moec, chief economist at insurance giant AXA.
However, the U.S. previously labeled Switzerland a currency manipulator in President Trump's first term, and with the threat of stringent tariffs in his second, the SNB might be wary of using that particular tool.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
06-19-25 0413ET
