The Swiss National Bank’s recent interest rate decisions have become increasingly unpredictable, with five out of twelve diverging from market expectations. In a surprising adjustment, the SNB cut rates to 0.25 percent amidst ongoing inflation stability and a weakening Swiss franc. Factors influencing the franc’s decline include EU military spending and increased bond yields in Europe. The future of SNB’s interest rates remains uncertain, balancing potential economic impacts from global trade policies and European financial stimulus.
Unpredictable Moves of the Swiss National Bank
Once, the actions of the Swiss National Bank (SNB) were as reliable as the dawn breaking each day. However, those days are behind us. Over the past three years, analysts and market watchers have found themselves grappling with the challenge of forecasting SNB’s decisions. According to UBS, five out of the last twelve interest rate decisions diverged from what the market anticipated. In fact, flipping a coin might have proven just as effective as the intricate models used by experts.
Recent Interest Rate Adjustments and Economic Indicators
The recent interest rate decision unfolded amidst significant uncertainty. While there were solid reasons to keep the SNB’s key interest rate at 0.5 percent, a majority of economists predicted a continuation of the trend of decreasing interest rates that began in March 2024. In a surprising move, the SNB aligned itself with the majority and reduced the key interest rate by 0.25 percentage points to 0.25 percent, following a more substantial cut of 0.5 percentage points in December.
Inflation has not presented major surprises recently. The SNB has slightly adjusted its revised inflation expectations from December, raising the forecast for this year from 0.3 percent to 0.4 percent. For 2026, the projection remains at 0.8 percent, based on the assumption that the key interest rate stays at its current level. The SNB points out that the risk of inflation falling below expectations is currently greater than that of it exceeding them.
Despite these adjustments, the SNB does not face significant pressure. The feared drop in inflation below the target range of 0 to 2 percent is not materializing. Although inflation dipped to 0.3 percent in February compared to the previous year, it has begun to rise again compared to the previous month, indicating a low risk of deflation. Core inflation, which excludes the volatile prices of energy and food, has remained stable at approximately 0.9 percent, serving as a reliable long-term price trend indicator.
Exchange rates have also not posed any immediate challenges. The Swiss franc has experienced a slight decline in recent months, and there is no clear trend of investors flocking to the franc as a safe haven amidst geopolitical tensions. This depreciation means that import prices are not decreasing as significantly, reducing the inflation-mitigating impact of imports. The SNB likely welcomes this situation, as the diminished upward pressure on the franc means less need for intervention in the foreign exchange markets.
But what is causing the franc to weaken against the euro? A significant factor is the planned military expenditures within the EU and Germany’s substantial debt initiatives. The circumvention of fiscal rules and expansive fiscal policies do not inspire long-term confidence in the euro. However, these borrowing actions lead to increased bond yields in the eurozone, making it less appealing for investors to hold the franc when European yields are higher.
The future of interest rate cuts by the SNB remains uncertain, and there are discussions about a potential return to negative interest rates. Although the SNB does not dismiss the possibility of lowering rates below zero, it recognizes that such a move is widely unpopular. Consequently, market sentiment suggests that the SNB will strive to maintain rates slightly above zero for the foreseeable future.
SNB President Martin Schlegel left the media speculating regarding the future trajectory of interest rates but indicated that the recent rate adjustment would have an expansive effect on the economy, potentially reducing the likelihood of further cuts. This statement may suggest that the cycle of interest rate reductions could be nearing its end, positioning the SNB as the first major central bank to conclude this trend after initiating it a year ago.
The SNB’s adherence to this outlook hinges on economic conditions. The landscape is uncertain; on one hand, U.S. tariff policies could negatively impact the global economy, including Switzerland. Conversely, substantial financial packages in Europe could provide an economic boost. An escalation in trade disputes might lead to lower interest rates due to reduced foreign demand, while a debt-fueled demand surge in Europe could signal the need for higher rates. The outcome remains to be seen.