SNB’s Brief Era of Positive Interest Rates May Be About to End

The Swiss National Bank (SNB) has been a bellwether for global monetary policy since its pioneering use of negative interest rates in 2015. Now, after a brief 30-month stint with positive rates, the SNB appears poised to reverse course. With inflation collapsing to zero in April 2025 and the Swiss franc surging nearly 9% against the U.S. dollar year-to-date, the central bank is signaling its readiness to slash rates to zero—or even re-enter negative territory—to combat economic headwinds.

The Case for a Rate Cut: Inflation, the Franc, and Global Risks

The SNB’s key policy rate currently stands at 0.25%, down from its last positive peak of 0.5% in September 2022. Recent statements by SNB Chair Martin Schlegel underscore a stark reversal: “If necessary, we are prepared to reintroduce a zero interest rate, or even a negative interest rate policy,” he emphasized on May 6, 2025. This flexibility reflects three critical pressures:

1. Vanishing Inflation: Swiss inflation plummeted to 0% in April 2025, driven by the strong franc’s downward pressure on import costs. The SNB’s conditional forecast for 2025 projects average inflation of just 0.4%, well within its price stability mandate but far below the central bank’s earlier 1.1% estimate.
2. Franc Appreciation: The CHF’s 9% rise against the USD since early 2025 threatens Swiss exporters, a sector critical to the country’s economy. A stronger franc makes Swiss goods pricier abroad, squeezing corporate margins and dampening growth.
3. Global Uncertainties: U.S.-China trade tensions and geopolitical risks have elevated market volatility, with spillover effects on Switzerland’s open, trade-reliant economy. Schlegel cited these factors as the “greatest risks” to price stability.

The Policy Crossroads: Zero or Negative Rates?

The SNB’s next policy meeting in mid-June 2025 is a critical juncture. Economists widely expect a cut to 0%, but Schlegel’s rhetoric leaves the door open for deeper measures. Negative rates, last abandoned in September 2022, are back on the table.

Why Negative Rates?

• Currency Suppression: Negative rates penalize holding CHF assets, potentially weakening the franc and boosting exports.
• Economic Stimulus: Lower rates reduce borrowing costs for businesses and households, though their effectiveness is debated.
• Global Context: The U.S. Federal Reserve and European Central Bank have paused rate hikes, creating a less restrictive environment for the SNB to act.

Risks and Trade-offs

• Bank Profit Margins: Negative rates squeeze banks’ net interest income, as they pass costs to depositors cautiously.
• Savings Incentives: Negative rates discourage savings, potentially undermining long-term economic stability.
• Market Speculation: Reintroducing negative rates could further destabilize currency markets, drawing speculative flows.

Implications for Investors

The SNB’s potential policy shift has profound implications for Swiss and global markets:

1. Currency Markets

A return to negative rates would likely weaken the CHF, benefiting exporters like Roche (OTCMKTS:RCHBY) and Nestlé (OTCMKTS:NSLXF). Conversely, Swiss franc-denominated bonds could become less attractive to yield-seeking investors.

2. Equity Markets

Swiss equities, particularly export-oriented sectors, might rally on a weaker franc. The Swiss Market Index (SMI)—dominated by firms like UBS and Novartis—could see gains, though global trade risks remain a drag.

3. Fixed Income

Swiss government bonds are poised to outperform as yields drop. The 10-year Swiss government bond yield, currently at 1.2%, could decline further if rates turn negative, boosting bond prices.

4. Real Estate and Commodities

Negative rates historically buoy real estate, as cheap borrowing fuels demand. Switzerland’s real estate market, already tight in urban centers, could see further price appreciation. Meanwhile, commodities priced in USD might gain if the CHF weakens.

Conclusion: A New Era of Monetary Experimentation

The SNB’s potential return to negative rates marks a pivotal moment. With inflation at zero, a surging franc, and global trade tensions, the central bank is gambling that aggressive easing will stabilize the economy without sparking financial instability.

Key data underscores the urgency:
- Inflation: Zero in April 2025 vs. the SNB’s 0.4% annual target.
- GDP Growth: A modest 1–1.5% forecast for 2025, with risks skewed to the downside.
- Policy Rate Path: A June cut to 0% is all but certain, with negative rates possible by year-end if inflation remains subdued.

Investors should prepare for a weaker CHF, higher equity valuations for exporters, and a prolonged low-yield environment. The SNB’s next move isn’t just about interest rates—it’s a test of whether unconventional policies can still steer the Swiss economy in an era of global uncertainty.

Stay vigilant: The June meeting will decide whether Switzerland’s brief flirtation with positive rates ends with a whimper—or a return to uncharted monetary territory.