Swiss Monetary Policy at a Crossroads: Evaluating the SNB's Rate-Cutting Path and Its Impact on Franc-Denominated Assets

The Swiss National Bank (SNB) has embarked on an aggressive rate-cutting cycle in 2024–2025, reducing its key policy rate to 0.25% by March 2025—the lowest level since the 2009 financial crisis. This easing trajectory, driven by deflationary pressures and a surging Swiss franc, has created a complex landscape for investors holding Swiss Franc (CHF)-denominated assets. While the SNB’s forward-looking inflation forecasts suggest a high bar for further easing, the interplay of currency dynamics, global trade tensions, and domestic economic fragility will shape the central bank’s next moves—and the valuation of equities, bonds, and forex instruments.

A High Bar for Easing: Inflation, Growth, and Currency Stability

The SNB’s September 2024 monetary policy statement underscored a critical shift: inflation, projected at 0.5–0.6% for 2025, remains within its 0–2% target range but faces downward risks from the franc’s relentless appreciation [1]. According to a report by Reuters, the SNB has revised its conditional inflation forecasts downward repeatedly, reflecting the deflationary drag of a strong currency and weak external demand [5]. This creates a paradox: while the SNB aims to stabilize inflation, the franc’s strength—driven by its safe-haven status amid U.S. trade policy uncertainty—threatens to erode export competitiveness and deepen deflationary pressures [4].

Economic growth, meanwhile, has stagnated. The OECD notes that Swiss GDP growth in 2024 averaged 0.9%, below potential, with sectoral divergences emerging between resilient services and struggling manufacturing [2]. The SNB’s rate cuts have failed to offset the franc’s impact on export-oriented industries, which now face margin compression from currency appreciation. As stated by the SNB in its March 2025 policy review, “monetary easing alone may prove insufficient to counteract the structural challenges posed by an overvalued franc” [1].

The Dual Tools of Easing: Rates and FX Interventions

The SNB’s toolkit now includes both interest rate adjustments and foreign exchange interventions. While rate cuts have brought the key rate to 0.25%, analysts predict further reductions, potentially into negative territory by September 2025 [1]. However, the central bank has signaled a preference for FX interventions to manage the franc’s strength. Historical precedents, such as the SNB’s 2022 interventions costing over CHF 100 billion, demonstrate its willingness to expand its balance sheet to stabilize the currency [3].

This dual approach carries distinct implications. For instance, negative rates could exacerbate the challenges faced by Swiss banks, which have already seen reduced interest margins due to prior rate cuts [2]. Meanwhile, FX interventions risk accusations of currency manipulation—a concern heightened by U.S. political rhetoric [4]. The SNB’s balance sheet, already swollen by foreign currency holdings, faces growing volatility as exchange rates fluctuate [3].

Implications for CHF-Denominated Assets

The SNB’s policy trajectory directly affects Swiss equities, bonds, and forex instruments.

1. Equities: A weaker franc, achievable through rate cuts or interventions, could boost export-driven sectors like machinery and pharmaceuticals. However, the SNB’s reluctance to weaken the franc aggressively—fearing inflation overshoots—limits upside potential. For example, the SNB’s March 2025 rate cut failed to reverse the franc’s 10% appreciation against the U.S. dollar since early 2024, leaving exporters vulnerable [1].

2. Bonds: Swiss government bond yields have turned negative for maturities up to four years, reflecting investor flight to safety amid global uncertainty [2]. The SNB’s inflation forecasts suggest yields may remain suppressed, but further rate cuts could deepen negative yields, pressuring pension funds and insurers reliant on fixed-income returns [4].

3. Forex: The franc’s safe-haven status ensures continued inflows during global volatility, but this dynamic clashes with the SNB’s inflation targets. As noted by UBS, capital outflows from CHF assets have accelerated due to the unattractive yield environment, compounding the SNB’s dilemma [4].

The Path Forward: Balancing Competing Priorities

The SNB’s next rate decision, expected in September 2025, will hinge on three factors:
- Inflation persistence: If inflation remains below 0.7% in Q2 2025, the SNB may accelerate rate cuts.
- Currency stability: A franc above CHF 0.85/USD could trigger renewed interventions.
- Global trade dynamics: U.S. tariff policies and geopolitical risks will dictate the franc’s safe-haven demand.

Investors must prepare for a prolonged period of low—or negative—interest rates and currency volatility. For CHF-denominated equities, sectoral diversification (favoring services over manufacturing) may mitigate franc-related risks. Bond investors, meanwhile, should brace for extended negative yields and consider hedging strategies to offset currency exposure.

Conclusion

The SNB’s monetary policy is at a crossroads, constrained by the need to balance inflation stability, currency strength, and economic growth. While the central bank has demonstrated flexibility in its approach, the high bar for further easing—coupled with global uncertainties—suggests a cautious, incremental path forward. For investors, the key takeaway is clear: the SNB’s actions will remain a critical determinant of Swiss asset valuations, demanding close monitoring and strategic adaptability.

Source:
[1] Swiss National Bank flags economic uncertainty after latest rate cut, [https://www.reuters.com/markets/rates-bonds/swiss-national-bank-cuts-rates-2025-03-20/]
[2] OECD Economic Surveys: Switzerland 2024, [https://www.oecd.org/en/publications/oecd-economic-surveys-switzerland-2024_070d119b-en.html]
[3] The era of relentless Swiss franc appreciation is coming to an end, [https://www.ubp.com/en/news-insights/newsroom/the-era-of-relentless-swiss-franc-appreciation-is-coming-to-an-end]
[4] Swiss franc's surge on tariff turmoil pressures SNB to act, [https://www.reuters.com/world/europe/swiss-francs-surge-tariff-turmoil-pressures-snb-act-2025-04-23/]