On Thursday, the Swiss National Bank (SNB) reduced its interest rates by 25 basis points, bringing the key rate to zero percent. This move has intensified concerns about a possible return to negative interest rates.
The decision was widely anticipated, with markets pricing in an 81% chance of a quarter-point cut and a smaller chance of a larger reduction.
SNB Responds to Lower Inflationary Pressure
The SNB cited a decrease in inflationary pressure compared to the previous quarter as the reason for easing monetary policy. The central bank emphasized its commitment to ensuring inflation remains consistent with price stability over the medium term.
Switzerland is currently grappling with deflation, with consumer prices falling by 0.1% annually in May.
SNB Chairman Martin Schlegel told CNBC that short-term negative inflation readings do not justify lowering rates below zero, focusing instead on the medium-term outlook.
The Swiss franc’s status as a safe-haven currency has contributed to low inflation by pushing down prices of imported goods. Recent market stress has strengthened the franc, presenting ongoing challenges for the SNB.
Charlotte de Montpellier, senior economist at ING, explained that Switzerland’s open economy and reliance on imports make the currency’s strength a key factor in keeping inflation low.
To counteract this, the SNB plans to keep rates systematically lower than other countries to temper the franc’s rally.
Potential for Negative Interest Rates and Associated Risks
Economists like Adrian Prettejohn from Capital Economics predict the SNB might lower rates to -0.25% this year and possibly as low as -0.75%, echoing levels from the 2010s if inflation remains subdued.
However, SNB Chairman Schlegel warned that moving into negative rates is a serious decision with higher hurdles due to its challenges and side effects.
Negative rates can encourage borrowing and investment by making money cheaper but pose risks to savers and banks, potentially squeezing bank profits and impacting financial stability.
ING’s de Montpellier added that sustained negative rates might distort markets, compress bank margins, and raise long-term stability concerns.
Following the rate cut, the Swiss franc strengthened, with the U.S. dollar trading flat against it.
The SNB’s next interest rate decision is scheduled for September, with uncertainty remaining over the future path of rates.
Author’s Opinion
Switzerland’s move to zero interest rates highlights the delicate balancing act central banks face when inflation turns negative but the economy remains fragile. While lower rates can stimulate growth and weaken the currency, prolonged negative rates risk undermining savers’ returns and banking sector health. The SNB must tread carefully to avoid unintended consequences that could destabilize its financial system.
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