Zurich (AFP) – The Swiss National Bank cut interest rates to zero percent on Thursday as inflation cools and the franc strengthens, while the economic outlook has deteriorated. The SNB, however, held off a decision to return to its era of negative rates — a policy that helped to curb the Swiss franc’s rise but was unpopular among pension funds and other investors.
The franc’s movement is also under scrutiny in the United States, as the US Treasury Department added Switzerland to its watch list of countries likely to manipulate their currencies earlier this month. The SNB says its interventions in the foreign exchange market aim to ensure price stability, not unduly increase the Swiss economy’s competitiveness. The Swiss currency is a safe haven investment that has climbed against the dollar since US President Donald Trump launched his tariff blitz in April.
In Thursday’s statement, the SNB — which has denied manipulating the franc — said it “remains willing to be active in the foreign exchange market as necessary”. The SNB cited easing inflationary pressure in its decision to cut rates by a quarter point, but it also pointed to a gloomy economic forecast. “The global economic outlook for the coming quarters has deteriorated due to the increase in trade tensions,” the central bank said, adding that the outlook for Switzerland remained uncertain. “Developments abroad continue to represent the main risk,” it said, expecting growth in the global economy to weaken over the coming quarters.
– Cooling inflation – The SNB said Swiss gross domestic product growth was strong in the first quarter of the year — largely due to exports to the United States being brought forward ahead of Trump’s tariff manoeuvres. But stripping that factor out, growth was more moderate and is likely to slow again and remain subdued for the rest of the year, the SNB said. The SNB expects GDP growth of one percent to 1.5 percent for 2025, and for 2026 too. It said Swiss unemployment was likely to continue to rise slightly. The bank lowered its inflation forecast for 2025 from 0.4 percent to 0.2 percent, and for 2026 from 0.8 percent to 0.5 percent. The consumer price index even fell into negative territory in May, at minus 0.1 percent.
– Negative rates – Between 2015 and 2022, the SNB’s monetary policy was based on a negative interest rate of minus 0.75 percent — which increased the cost of deposits held by banks and financial institutions relative to the amounts they were required to entrust to the central bank. Those seven years left a bitter memory for major savers, who bore the brunt in fees, while pension funds were forced into riskier investments. Negative rates make the Swiss franc less attractive to investors as it reduces returns on investments.
Thursday’s decision was widely expected by analysts. Adrian Prettejohn, Europe economist at the London-based research group Capital Economics, said the SNB is expected to move rates to negative 0.25 percent at its September meeting due to deflation. “There are also significant downside risks to inflation from trade tensions as well as heightened geopolitical uncertainty, which could push up the value of the franc further,” he said. He said the central bank’s language on currency interventions “supports our view that the SNB is not planning to use foreign exchange interventions as its main tool for loosening monetary policy anytime soon”.
© 2024 AFP
