After six consecutive rate cuts from March last year to June this year, the SNB is set to keep its key policy rate unchanged in their September decision this week. The move back in June saw them bring down rates to 0%, so we're back in zero-interest rate policy (ZIRP). The threshold in moving from higher rates to here is one thing but as policymakers have made clear, the threshold from moving from here to negative interest rate policy (NIRP) is a much higher one.
Similar to what we're seeing in Japan, the Covid pandemic gave the SNB an out to move away from NIRP. They embraced that but in the end, it looks like they've failed to dig themselves out of the hole. It feels like it is only a matter of time before negative rates return but this week won't be that.
Markets are not pricing in any more rate cuts for the SNB for the year and even looking to next year, the pricing is relatively tentative. There's no strong conviction for a further rate cut.
That being said, the equation and the SNB's fate very much relies on the Swiss franc from hereon. So, things can change quickly if and when it does.
The thing about aggressive easing and dealing with low inflation, the SNB has to balance out the strength of the currency as well as its policy mandate. USD/CHF is down over 12% this year, largely owing to the dollar's own plight. However, EUR/CHF hasn't really budged and is still holding near 0.9300 for the better part of 2025. We're just a hop, skip, and a crisis away from breaking to fresh record lows for the pair.
As such, the SNB may be cornered into pursuing negative rates so long as the the franc continues to be one of the top performers in the major currencies space.
That especially as domestic inflation pressures continue to underwhelm. The latest report in August here shows core annual inflation slipping to 0.7%. It's still not quite at alarming levels to prompt immediate action by the SNB but we're not that far away.
If inflation developments play out softer than what the central bank is forecasting, it's only a matter of time before we start seeing the SNB change their view on negative rates.
That's the key risk when viewing the SNB outlook at the moment and shows where the balance of risks are skewed towards.
As much as the Swiss central bank maintains that there is a high bar before reaching negative rates, the path of least resistance is still favouring easier and looser monetary policy moving forward rather than a tighter one.
And the paradox here is that it could be one triggered and fueled by a stronger currency. I definitely do not envy being in the SNB's position.
