The Swiss National Bank's Deflation Dilemma: Negative Rates on the Horizon?

The Swiss National Bank (SNB) is once again facing a familiar foe: deflation. In May 2025, Switzerland's Consumer Price Index (CPI) dipped into negative territory for the first time since March 2021, falling 0.1% year-on-year. This decline, driven by a strong Swiss franc and plunging global energy prices, has reignited debates about the SNB's willingness to return to its old playbook of negative interest rates Swiss deflation fuels talks of negative interest rates: Is …^[1]. For investors, this signals a pivotal moment in central bank policy and a potential reshaping of risk-return dynamics in a deflationary environment.

The Deflationary Headwinds

Switzerland's deflationary slide is no accident. A 2.4% drop in the cost of imported goods, fueled by the franc's strength against the euro and the U.S. dollar, has squeezed domestic inflation. Meanwhile, global energy prices—still reeling from oversupply in the oil market—have compounded the downward pressure on CPI What a return to negative territory for Swiss inflation means for …^[2]. According to a report by Bloomberg, this combination has left the SNB with a narrow window to act before deflationary expectations take root, eroding consumer and business confidence.

The SNB's hands are tied by history. From 2014 to 2022, it famously imposed negative rates to combat currency appreciation and stimulate growth. Now, with inflation hovering near zero and the franc trading at a 10-year high, Chair Martin Schlegel has left the door open for a return to such measures. “We're not ruling out any scenario,” Schlegel stated in a recent press briefing, including a cut to -0.25% by September 2025 Swiss National Bank 'ready to consider' negative …^[3]. Goldman Sachs analysts have even priced in a 40% probability of deeper cuts to -0.75%, a level that would mark the most aggressive negative rate policy in the SNB's modern history Swiss deflation fuels talks of negative interest rates: Is …^[1].

The Policy Crossroads

The SNB's dilemma lies in balancing its dual mandate: stabilizing the franc while keeping inflation within the 0%–2% band. A return to negative rates would likely weaken the franc, boosting export competitiveness but risking capital flight. However, the U.S. Treasury's recent inclusion of Switzerland on its currency manipulation watchlist has complicated matters. Analysts at ING note that the SNB may prioritize rate cuts over foreign exchange interventions to avoid diplomatic friction, even if it means tolerating a stronger franc temporarily What a return to negative territory for Swiss inflation means for …^[2].

For investors, this creates a paradox. Negative rates typically punish savers and depress bond yields, but they also incentivize risk-taking. A weaker franc would benefit Swiss exporters like Nestlé and Roche, while hurting import-dependent sectors such as retail. Meanwhile, global investors holding Swiss assets could face capital losses if the franc rebounds after rate cuts.

The Bottom Line

The SNB's potential pivot to negative rates underscores a broader theme: central banks are increasingly willing to embrace unconventional tools to combat deflation. For now, the market is pricing in a -0.25% policy rate by September, but the real test will come if inflation fails to rebound. If the SNB follows through, investors should brace for a shift in asset allocation, with a tilt toward equities and commodities as hedges against currency volatility.

As the SNB navigates this deflationary crossroads, one thing is clear: the era of ultra-loose monetary policy isn't over—it's just getting more creative.