Will the SNB return to negative rates?

Market participants fully anticipate the SNB to cut the policy rate by 25 basis points to 0.00% on June 19. Furthermore, the prices of futures contracts on the Swiss short-term interest rate point to a 25% probability that the policy rate will turn negative before year-end either following a 50 basis points cut in June or another 25 basis point reduction in the policy rate after the summer. 

However, with the economy growing above expectations in early 2025 and showing resilience in Q2 there is no urgency for the central bank to return to negative interest rates, an unpopular policy among the Swiss public.

The market expectation of a rate cut in June reflects the recent decline in inflation. Headline CPI fell 0.1% year on year (yoy) in May and core CPI, as measured by the Federal Statistical Office, rose only 0.5% yoy. The data up to May points to another undershoot of March SNB’s conditional inflation forecast.

The surprisingly low inflation in early 2025 was due to the unexpected weakness of petroleum product prices and the moderation in prices of tourism and other services. While the former shock can be overlooked, the latter may be a harbinger of a softening in domestic pressures on consumer prices.

Looking forward, the SNB is probably concerned by the above 4% rise of the Swiss franc trade weighted index since early April. The currency strength has likely had little impact on CPI so far but poses downside risks to inflation over the next several months.

A gradual rate cut, although already priced in, seems appropriate also to limit the risk of a further appreciation of the franc, at least in the short run. 

The SNB's cautious stance on monetary easing appears justified by the current growth outlook. Swiss GDP saw significant growth in the first quarter of 2025, likely driven by accelerated exports to the US to circumvent tariffs. Business surveys, along with consumer demand and job market data, suggest a slowdown in economic activity in the second quarter, but not a complete downturn.

The forecast for Swiss GDP is strengthened by expected higher fiscal spending in Germany, Switzerland's main export destination. The boost to Swiss growth from the eurozone's fiscal stimulus is likely to largely counterbalance the anticipated negative impact of Trump's tariffs, maintaining Swiss GDP near its potential.

After cutting the policy rate to zero on 19 June, the SNB will keep all policy options on the table, including negative interest rates and foreign exchange interventions. If the adverse consequences of US tariffs on growth were to prevail in the coming quarters, the risk of a prolonged period of negative inflation would increase strongly and the SNB would be forced to act. Adopting measures that are not welcomed by the Swiss public could become necessary to meet the SNB’s inflation target. 

To conclude, a 25 basis point cut in the policy rate to 0% is the most likely outcome of the next SNB meeting given the uncertain outlook. The options of negative interest rates and of currency interventions remain on the table and could be implemented depending on US trade policy, the eurozone fiscal boost and the strength of the Swiss franc.

Important Information

The value of investments and the income derived from them can fall as well as rise, and past performance is no indicator of future performance. Investment products may be subject to investment risks involving, but not limited to, possible loss of all or part of the principal invested.

This document does not constitute and shall not be construed as a prospectus, advertisement, public offering or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. It is not intended to be a final representation of the terms and conditions of any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction. The information in this document does not take into account the specific investment objectives, financial situation or particular needs of the recipient. You should seek your own professional advice suitable to your particular circumstances prior to making any investment or if you are in doubt as to the information in this document.

Although information in this document has been obtained from sources believed to be reliable, no member of the EFG group represents or warrants its accuracy, and such information may be incomplete or condensed. Any opinions in this document are subject to change without notice. This document may contain personal opinions which do not necessarily reflect the position of any member of the EFG group. To the fullest extent permissible by law, no member of the EFG group shall be responsible for the consequences of any errors or omissions herein, or reliance upon any opinion or statement contained herein, and each member of the EFG group expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document.
The availability of this document in any jurisdiction or country may be contrary to local law or regulation and persons who come into possession of this document should inform themselves of and observe any restrictions. This document may not be reproduced, disclosed or distributed (in whole or in part) to any other person without prior written permission from an authorised member of the EFG group.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG group and the worldwide subsidiaries and affiliates within the EFG group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389746. Registered address: EFG Asset Management (UK) Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.