Swiss National Bank Prepares Negative Interest Rate Return as Inflation Hits Zero and Trade Tensions Rise
Swiss Central Bank Signals Return to Negative Rates as Global Trade Tensions Mount
ZURICH — The Swiss National Bank is preparing to venture back into the controversial territory of negative interest rates, just two and a half years after abandoning the policy, as inflation has evaporated to zero percent and global trade uncertainties linked to President Trump's policies continue to strengthen the Swiss franc.
Negative interest rates are an unconventional monetary policy tool where central banks charge commercial banks a fee for holding their excess reserves. This encourages commercial banks to lend money to businesses and consumers, rather than keeping it at the central bank, thereby aiming to stimulate economic activity.
In a signal that has sent ripples through European financial markets, SNB Chairman Martin Schlegel explicitly stated on May 6 that the central bank stands "certainly willing to reintroduce negative rates" if necessary to fulfill its mandate of price stability—a remarkable policy reversal that underscores the mounting pressures on Switzerland's export-dependent economy.
"We will uphold our commitment to our mandate, regardless of the circumstances," Schlegel emphasized, even while acknowledging that "negative interest rates are not favored by anyone."
The Vanishing Inflation Crisis
Switzerland now finds itself at a critical economic juncture. The SNB's key interest rate currently sits at 0.25% following its fifth consecutive rate cut in March, yet inflation has continued its downward trajectory, touching 0% in April—its lowest point in four years and precariously positioned at the absolute bottom of the SNB's target range of 0-2%.
Switzerland's Inflation Rate (CPI) – Recent Trend Toward Zero
| Period | Inflation Rate (%) | Notes |
|---|---|---|
| Annual 2022 | 2.8 | Average annual inflation |
| Annual 2023 | 2.1 | Average annual inflation |
| December 2023 | 1.7 | Year-over-year |
| Annual 2024 | 1.1 | Average annual inflation |
| December 2024 | 0.6 | Year-over-year |
| January 2025 | 0.4 | Year-over-year |
| February 2025 | 0.3 | Down from 0.4% in January. Lowest since Apr 2021 |
| March 2025 | 0.3 | Unchanged. Near four-year low |
| April 2025 | 0.0 | Unchanged. Lowest since March 2021 |
| Forecast 2025 | 0.6–0.7 | Various projections |
| Forecast 2026 | 1.2 | Projected by Trading Economics |
This inflation vacuum has not emerged in isolation. The Swiss franc has strengthened by nearly 9% against the dollar since the beginning of 2025, a movement partially attributed to market uncertainty surrounding what some analysts have termed "the trade war declared by Washington." This currency appreciation acts as a deflationary force by making imported goods less expensive for Swiss consumers, while simultaneously eroding the competitive position of Swiss exporters in global markets.
Swiss Franc (CHF) to US Dollar (USD) – Exchange Rate in 2025
| Date | Exchange Rate (1 CHF = USD) | Notes |
|---|---|---|
| Jan 12, 2025 | 1.0907 | Lowest in 2025 |
| Jan 13, 2025 | 1.0906 | Slightly lower; 6-month low |
| January 2025 | 1.0989 | Monthly average |
| Jan 31, 2025 | 1.0990 (approx.) | Based on 1 USD = 0.909908 CHF |
| February 2025 | 1.1059 | Monthly average |
| Feb 28, 2025 | 1.1066 (approx.) | Based on 1 USD = 0.903681 CHF |
| March 14, 2025 | 1.1300 | Mid-month data point |
| March 2025 | 1.1301 | Monthly average |
| Mar 31, 2025 | 1.1308 (approx.) | Based on 1 USD = 0.884314 CHF |
| April 2025 | 1.1977 | Monthly average |
| Apr 21, 2025 | 1.2369 | Highest in 2025 |
| Apr 22, 2025 | 1.2356 | Nearly as high as Apr 21 |
| Apr 30, 2025 | 1.1993 (approx.) | Based on 1 USD = 0.833833 CHF |
| May 7, 2025 | 1.2094 (approx.) | Based on 1 USD = 0.8267 CHF |
| May 8, 2025 | 1.2112 | Monthly average (partial, 8 days) |
Currency appreciation can help reduce inflation by making imports cheaper for domestic consumers. Conversely, it tends to negatively impact exporters, as their goods become more expensive and thus less competitive in international markets.
The potential return to sub-zero rates represents a significant policy pivot. Switzerland abandoned negative rates in September 2022, when it raised its key rate from -0.25% to +0.50% amid the global inflation surge that followed the pandemic. Now, the pendulum appears to be swinging dramatically in the opposite direction.
Swiss National Bank (SNB) Policy Interest Rate History
| Date | Policy Rate (%) | Change (pp) | Key Context / Notes |
|---|---|---|---|
| Dec 18, 2014 | -0.25 | –0.25 | First introduction of negative interest rates on sight deposits |
| Jan 15, 2015 | -0.75 | –0.50 | SNB deepens negative rates; also ends EUR/CHF 1.20 floor |
| Jun 16, 2022 | -0.25 | +0.50 | First rate hike since 2007; beginning of exit from negative territory |
| Sep 22, 2022 | 0.50 | +0.75 | Official end of negative interest rates |
| Jun 22, 2023 | 1.75 | +0.25 | Final hike in tightening cycle to fight high inflation |
| Dec 14, 2023 | 1.75 | 0.00 | Rate held steady |
| Mar 21, 2024 | 1.50 | –0.25 | Start of easing cycle |
| Jun 20, 2024 | 1.25 | –0.25 | |
| Sep 26, 2024 | 1.00 | –0.25 | |
| Dec 12, 2024 | 0.50 | –0.50 | Continued monetary easing |
| Mar 20, 2025 | 0.25 | –0.25 | Fifth consecutive cut; inflation down to 0.3% in Feb 2025 |
Trump's Trade Policies Cast Long Shadow Over Alpine Economy
The fingerprints of President Trump's trade policies are clearly visible on Switzerland's economic outlook. SNB officials have flagged "significantly" increased uncertainty regarding the global impact of Trump's trade strategies since his return to office in January.
A potential global trade dispute has emerged following Trump's tariff increases and retaliatory measures from Europe, creating precisely the kind of uncertain economic environment that historically drives investors toward safe-haven assets like the Swiss franc.
Safe-haven assets are investments sought by investors during times of market turmoil or economic uncertainty because they are expected to retain or increase their value. These assets, which can include specific currencies like the Swiss Franc or commodities such as gold, offer a refuge when other investments are performing poorly.
For Switzerland's crucial export sectors—watches, machinery, and medical technology—this presents a double blow: direct exposure to new U.S. tariffs affecting approximately CHF 8 billion worth of exports, combined with the competitive disadvantage of a strengthening currency.
"The combination of tariffs and currency appreciation creates an almost perfect storm for certain exporters," noted a senior economist at a Zurich-based financial institution. "Particularly vulnerable are mid-sized companies that lack the global pricing power of multinationals like Nestlé, which can more easily adjust their dollar-denominated pricing strategies."
The Mechanics of a Negative Rate Return
Market expectations have rapidly shifted as the SNB's policy direction becomes clearer. Most economists now anticipate the central bank will cut rates from the current 0.25% to 0% at its next policy meeting on June 19. Increasingly, analysts project rates could fall into negative territory before year's end, potentially reaching as low as -0.50% by December if current trends persist.
The Swiss government has already adjusted its economic forecasts downward, projecting 1.4% growth in 2025, a reduction from the earlier estimate of 1.5%. Should U.S. tariffs on China reach 60% and 25% on other nations in a worst-case scenario, Swiss GDP growth could deteriorate substantially further.
Swiss GDP Growth Forecasts for 2025 – Original vs. Revised
| Institution | Original Forecast | Revised Forecast | Revision Date | Notes |
|---|---|---|---|---|
| SECO | 1.5% | 1.4% | March 18, 2025 | Official government forecast |
| KOF Swiss Economic Institute | 1.6% | 1.4% | March 26, 2025 | |
| KOF Consensus Forecast | 1.5% | 1.4% | March 24, 2025 | Based on survey of economists |
| Swiss Bankers Association | — | 1.3% | March 4, 2025 | Original forecast not specified |
| Swiss National Bank (SNB) | — | ~1.5% | September 26, 2024 | Long-term projection |
| SECO (previous) | 1.7% | 1.6% | September 18, 2024 | Previous revision |
| Julius Baer | — | 1.3% | December 4, 2024 | Private sector outlook |
| KOF (older report) | 1.8% (adjusted) | 1.4% | December 13, 2023 | Adjusted for sports event effects |
The SNB appears to be deploying a two-pronged approach to address these challenges. Beyond interest rate policy, the central bank maintains readiness to intervene in foreign exchange markets to devalue the Swiss franc—though such interventions have slowed to what market participants describe as a "trickle," with only CHF 1.2 billion deployed in 2024. This relative restraint preserves the SNB's balance sheet capacity for more aggressive interventions should they become necessary.
Central banks intervene in foreign exchange markets primarily by buying or selling currencies to influence their exchange rates. For example, a central bank might sell its own currency (and buy foreign currency) to devalue it, or buy its own currency (and sell foreign currency) to strengthen it.
Financial Sector Braces for Impact
Switzerland's financial institutions are already preparing for another round of margin compression. Research from Ernst & Young indicates that 40% of Swiss banks were already anticipating profit declines even before the prospect of negative rates reemerged. While Zurich's private banking sector remains well-capitalized following the Credit Suisse unwinding, most institutions are expected to offset margin pressure by raising fees and expanding cross-selling of foreign exchange hedging products.
For Swiss households, the rate environment presents a mixed picture. Fixed 10-year mortgage rates have already declined below 1.40% and would likely approach 1% if policy rates fall to -0.25%, extending the ongoing refinancing wave. This could further fuel Switzerland's already heated real estate market, with multi-family housing prices potentially seeing another significant appreciation phase.
Swiss 10-Year Fixed Mortgage Rate Trends
| Source / Provider | Rate (From) | Date/Period | Notes |
|---|---|---|---|
| UBS key4 mortgages | 1.37% | May 5, 2025 | Indicative rate for Zurich; CHF 500,000 loan, 20% affordability, 50% loan-to-value |
| Comparis | 1.65% | March 2025 | For CHF 750,000 mortgage |
| MoneyPark | From 1.25% | Undisclosed | Best rates across 100+ lenders; actual rate varies |
| Comparis (End of Q3) | 1.81% | September 2024 | Down 0.33 pp from end of June 2024 |
| Comparis (Q3 Average) | 1.5% – 2.0% | Q3 2024 | Quarterly average of 10-year fixed rates |
The Global Investor's Playbook
For global investors, Switzerland's potential return to negative rates reopens strategic playbooks that had been shelved since 2022. The prospect of sub-zero CHF funding revives potential carry trade opportunities versus higher-yielding currencies such as the Australian dollar, Mexican peso, and Indian rupee once market volatility stabilizes. Indeed, CFTC data already shows hedge funds rotating toward net-short positions in CHF futures, anticipating this development.
A currency carry trade is a strategy where an investor borrows a currency with a low interest rate and uses those funds to purchase a currency offering a higher interest rate. The primary goal is to profit from this interest rate differential, often referred to as the "carry."
However, the Swiss franc's safe-haven status remains intact and could dominate in the near term. In any significant equity market decline triggered by escalating tariff disputes, the franc would likely strengthen initially, making tactical long positions an effective hedge against tail risk events despite negative carrying costs.
Three Scenarios for Switzerland's Economic Future
Market strategists are mapping multiple potential outcomes for Switzerland's economy and financial markets over the next twelve months.
In the base case scenario, assigned a 55% probability by most analysts, the Swiss franc's trade-weighted index would decline by approximately 4%, with the SNB's policy rate falling to -0.25% and the 10-year government bond yield settling around -0.05%. This environment would favor Swiss investment-grade credit while suggesting a neutral stance on equities.
A more severe "shock scenario," given roughly 30% probability, envisions an intensified trade war driving the franc up by 6% on a trade-weighted basis, forcing the SNB to cut rates to -0.50% while resuming significant foreign exchange market interventions. Swiss 10-year yields could fall to -0.25% in this scenario, favoring long positions in the franc, gold, and suggesting short positions in European equities, particularly the German DAX.
The most optimistic "relief scenario," assigned only a 15% probability, would see a negotiated tariff truce leading to an 8% weakening of the franc, allowing the SNB to maintain rates at 0% and Swiss 10-year yields to rise modestly to +0.15%. Such conditions would favor short positions in the franc and rotation into cyclical Swiss equities.
Swiss Franc Outlook: SNB Policy Rate, Currency Forecasts, and Key Economic Indicators (2025–2026)
1. SNB Policy Rate Scenarios
| Scenario | Source | 2025 Rate | 2026 Rate | Notes |
|---|---|---|---|---|
| Baseline | SNB (Mar 2025) | 0.25% | 0.25% (assumed) | Rate cut in March 2025; forecast assumes stable path |
| Base Case | Trading Economics | 0.25% | 0.25% (assumed) | Reflects assumption in inflation outlook |
| Mild Dovish | ING (Mar 2025) | 0.25% | 0–0.25% | Pause expected mid-2025; 0% possible if external risks rise |
2. CHF Trade-Weighted and Exchange Rate Forecasts
| Indicator | Source | 2025 Forecast | 2026 Forecast | Notes |
|---|---|---|---|---|
| TWI (Nominal) | SNB (Mar 2025) | Down 1.4% (period review) | – | Depreciation vs EUR, GBP, JPY |
| USD/CHF Exchange Rate | LongForecast (Mar) | 0.8700 (Dec 2025) | 0.8700 early, 0.8840 end-2026 | Avg. Jun: 0.8580; Q3–Q4 range: 0.8570–0.9340 |
| USD/CHF Exchange Rate | CoinCodex (Mar) | 0.8817 (end-2025) | 0.8321 (end-2026) | USD up ~11% vs CHF by end-2025 |
| EUR/CHF Exchange Rate | Traders Union | 0.8897 (end-2025) | – | |
| EUR/CHF Exchange Rate | CoinCodex | 1.0959 (Nov 2025) | – | Sep 2025: 1.0676 |
3. Key Swiss Economic Forecasts
| Indicator | Source | 2025 Forecast | 2026 Forecast | Notes |
|---|---|---|---|---|
| GDP Growth (adj.) | KOF (Mar 2025) | 1.4% | 1.6% | Slight downgrade from Dec 2024 |
| GDP Growth (range) | SNB (Mar 2025) | 1.0–1.5% | ~1.5% | |
| GDP Growth | Gov. Expert Group (Dec 2024) | 1.5% | 1.7% | Down from previous Sept forecast |
| Inflation | SNB (Mar 2025) | 0.4% | 0.8% | Assumes 0.25% policy rate |
| Inflation | KOF (Mar 2025) | 0.5% | 0.8% | 0.1 pp drop vs. Dec 2024 |
| Unemployment Rate | KOF (Mar 2025) | 2.8% | 2.8% | Up from 2.7% in prior forecast |
| Unemployment Rate | Gov. Expert Group (Dec 2024) | 2.7% | 2.7% |
Investment Opportunities in a Negative Rate Environment
For investors seeking to position portfolios for Switzerland's evolving monetary landscape, several tactical opportunities are emerging. Swiss five-year government bonds appear attractive, as they would benefit from any policy rate cuts. Each 10 basis point reduction by the SNB would generate approximately 0.5% in total returns for these instruments.
Swiss 5-year government bond yield historical trend.
| Date | Yield (%) | Change (%) |
|---|---|---|
| May 7, 2025 | -0.023 | -174.19 |
| May 4, 2025 | 0.084 | N/A |
| Apr 30, 2025 | 0.079 | N/A |
| Apr 28, 2025 | 0.185 | N/A |
| Apr 8, 2025 | 0.262 | N/A |
| Mar 12, 2025 | 0.627 | N/A |
| Dec 3, 2024 | 0.031 | N/A |
| May 30, 2024 | 1.021 | N/A |
| Oct 2018 | -0.412 | N/A |
| Sep 2018 | -0.351 | N/A |
| Jul 1992 | 7.048 | N/A |
| Jun 2016 | -0.982 | N/A |
Options strategies provide another avenue, with one-year receiver swaptions on Swiss rates (strike 0%) offering relatively inexpensive optionality on deeply negative outcomes. The currency markets present direct opportunities as well, with short USDCHF positions serving as effective hedges against trade war escalation.
In equity markets, Switzerland's real estate sector stands to benefit significantly from the lower rate environment combined with continuing rent growth pressures. Additionally, quality Swiss banks may outperform their Eurozone counterparts, as the negative rate impact appears less punitive in Switzerland due to better fee income diversification.
Potential Disruptors to the Negative Rate Thesis
While the path toward negative rates appears increasingly likely, several factors could disrupt this trajectory. A rapid de-escalation of tariff tensions via a U.S.-EU mini-deal would likely weaken the franc and flatten the SNB's forecast curve, removing the immediate need for negative rates.
Though considered a low probability event given current gas storage levels and franc strength, an imported energy shock that pushed Swiss inflation significantly higher would also eliminate the rationale for negative rates.
Additionally, aggressive currency market interventions by the SNB could provoke unwanted attention from the U.S. Treasury Department, which retains the authority to label Switzerland a "currency manipulator"—a designation that would create additional diplomatic and economic complications for Swiss policymakers.
A country is labeled a "currency manipulator" when it's perceived to be intentionally influencing its exchange rate, typically to gain an unfair trade advantage. The US Treasury, for instance, uses specific criteria, such as significant trade surpluses and persistent currency market intervention, to make this designation.
Walking the Monetary Tightrope
As Switzerland contemplates its return to the negative interest rate experiment, the SNB finds itself performing a delicate balancing act. It must defend price stability by preventing outright deflation while shielding exporters from currency appreciation, all without triggering international accusations of manipulation.
For Switzerland, negative rates represent less a dramatic U-turn than a strategic recalibration—a high-stakes hedge against multiple economic threats. The country's willingness to deploy unconventional monetary tools highlights the extraordinary challenges facing small, open economies amid global trade tensions and divergent monetary policies.
As one veteran Swiss banker observed, "The SNB doesn't have the luxury of ideological purity when it comes to monetary policy. Our size and exposure to global forces mean we must be pragmatic above all else."
For now, markets and institutions across Switzerland are preparing for the likelihood that by year's end, the country will once again find itself in the rarefied company of economies paying borrowers to take their money—a powerful symbol of these extraordinary economic times.