The Swiss National Bank cut its interest rate to zero on Thursday in response to falling inflation, appreciation pressure on the Swiss franc and economic uncertainty caused by the U.S. administration's unpredictable trade policy.
The SNB reduced its policy rate by 25 basis points from 0.25%, as expected by markets and a Reuters poll.
It was the central bank's sixth rate cut in succession after it started reducing borrowing costs in March 2024.
The SNB is now on the brink of returning to negative interest rates, a policy it maintained from 2014 to 2022, but which was unpopular with banks, savers and insurance companies.
"Inflationary pressure has decreased compared to the previous quarter. With today's easing of monetary policy, the SNB is countering the lower inflationary pressure," the central bank said in a statement.
The rate cut came after Swiss annual inflation in May turned negative for the first time in four years, moving outside of the SNB's 0-2% target range.
The Swiss franc briefly strengthened after the decision, but retreated to trade steady on the day against the dollar at 0.8191 francs.
In its baseline scenario, the SNB said it anticipated that global economic growth would weaken in coming quarters, while it saw U.S. inflation rising. In Europe, by contrast, a further decrease in inflationary pressure is to be expected, it said.
The SNB said the outlook for the world economy remains subject to high uncertainty. Trade barriers could be raised further, leading to a more pronounced slowdown in the global economy, it noted. But it cannot be ruled out that fiscal policy will support growth more strongly than expected, it said.
FRANC STRENGTH
The Swiss move comes on a busy day for central banks, with Norway's central bank surprising markets with its first rate cut in five years, and the Bank of England rate decision due later.
On Wednesday, the U.S. Federal Reserve held its interest rates steady and signalled borrowing costs could fall later this year, while the European Central Bank trimmed its interest rate by 25 basis points earlier this month.
"The SNB has cut rates because the franc is stronger and the economic outlook in Switzerland is weaker following the 'Liberation Day' tariffs," said UBS economist Alessandro Bee, referring to sweeping tariffs U.S. President Donald Trump announced in April. "The SNB wants to prevent a further appreciation of the franc, which could help the Swiss exporters and also prevent inflation falling ever further."
Although inflation was only slightly negative in May, the full impact of the rising franc on prices will only be seen in the next few months, said EFG senior economist GianLuigi Mandruzzato.
He said the SNB would now probably pause its rate cuts, unless there was a significant downturn in the Swiss economy caused by higher U.S. tariffs.
"The wording of the SNB statement highlights the uncertainty around the outlook and that this is mainly due to developments outside of Switzerland," Mandruzzato said.
"All options remain on the table, including negative interest rates and foreign exchange markets interventions, but for them to be deployed, a further, meaningful deterioration of the outlook would be needed."
Switzerland's rate-sensitive two-year bond yield remained in negative territory, a sign markets still anticipate a move in Swiss rates below 0% in the months ahead.
The SNB took rates to zero after the franc has gained roughly 11% against the dollar in 2025, as investors sought safe havens, pushing down inflation by making imports cheaper.
The SNB says it will intervene in foreign currency markets if necessary to keep inflation on track, although two weeks ago, the United States added Switzerland to a list of countries being monitored for unfair currency and trade practices.
"The SNB's main concern may not be avoiding the impression of being a currency manipulator – still, it is politically wise not to appear too trigger-happy to go negative with the policy rate," said Karsten Junius, chief economist at J Safra Sarasin.
