Swiss National Bank Cuts Key Interest Rate to 0% Amid US Scrutiny

Switzerland has taken a decisive step in its monetary policy by cutting its key interest rate to 0%. This move comes as the Swiss National Bank (SNB) continues to intervene in foreign exchange markets to control inflation, despite recent scrutiny from the US government. The SNB's Chairman, Martin Schlegel, emphasized that the bank will persist in its forex actions if necessary to maintain price stability. This stance was reiterated during an interview with a Swiss broadcaster, where Schlegel clarified that the SNB's interventions are aimed at achieving price stability rather than gaining an unfair advantage for Swiss exporters.

The US Treasury's decision to add Switzerland to a watchlist for possible currency manipulation has put Bern in a challenging position. If the US escalates the issue, Switzerland could face significant trade tariffs. However, Schlegel asserted that this would not deter the SNB from pursuing its monetary policy goals. The latest rate cut, which reduced the interest rate by 25 basis points to 0%, was widely anticipated by markets. The SNB's statement indicated that inflationary pressure has decreased compared to the previous quarter, prompting the central bank to counter the lower inflationary pressure with its decision.

Schlegel also noted that while short-term price drops are visible, the SNB's focus remains on the medium term. He explained that repeated negative monthly inflation prints would not alter the bank's approach. The SNB has lowered its inflation forecast for 2025, now expecting average inflation at 0.2% this year and 0.5% in 2026. The economic outlook remains uncertain, with developments abroad posing the biggest threat. This is not the first time Switzerland has faced weak inflation, as similar conditions prevailed during the 2010s and early 2020s.

Economist Charlotte de Montpellier from ING, who covers France and Switzerland, highlighted that the Swiss franc tends to strengthen during periods of global stress. This systematic rise in the franc's value pushes down the price of imported products, impacting the consumer price index. Given Switzerland's reliance on imports, the strengthening of the franc consistently affects CPI inflation. To manage this, the SNB maintains interest rates lower than in other countries, aiming to slow the rise of the franc. Despite the recent rate cut, the Swiss currency remained firm, with the US dollar trading flat against it.

The SNB's aggressive monetary actions are complemented by support for stricter rules on UBS, Switzerland's largest bank. Martin endorsed new government proposals that could require UBS to hold an additional $26 billion in core capital. He emphasized that this measure is not radical and that ensuring UBS's strength and liquidity is in everyone's interest. Martin also mentioned past discussions with US officials regarding Switzerland's inclusion on the watchlist, noting a good understanding of the country's forex activities. He suggested that further dialogue would ensue if Switzerland remains on the list.

While other central banks are focused on combating inflation, Switzerland is dealing with deflation. The SNB is utilizing all available tools, including interest rates, market interventions, and bank capital rules, to maintain control. Despite potential pressure from the US, the SNB remains steadfast in its commitment to price stability and economic management.