This threshold will leave the SNB little room for maneuver in the second half of next year, which could push the national bank to consider unconventional measures, such as a return to negative rates.
Why a return to negative rates?
First of all, it is important to note that while inflation reached 2.5% in 2023, it has declined significantly since then, standing at just 0.6% year-on-year in October. In addition, Switzerland has just experienced five consecutive months of zero or negative inflation, a situation not seen since 2020.
In this context, a return to negative interest rates could constitute a lever to stimulate the economy and avoid prolonged deflation. Indeed, this monetary policy would encourage investments and consumption, while preventing a possible deflationary spiral which would harm the country’s economic growth.
The impact of the strong franc against the euro
Another factor that could prompt the SNB to cut rates below zero is the continued strength of the Swiss franc against the euro. Financial markets anticipate between five and six rate cuts by September 2025 from the European Central Bank (ECB), at a rate of -0.25% per reduction, compared to only three cuts for the SNB.
If these forecasts are confirmed, the rate differential between Switzerland and the euro zone should decrease and, consequently, strengthen the Swiss franc.
The effects of a return to negative rates
A possible return to negative rates could have contrasting effects. For borrowers, particularly mortgage holders and businesses, this measure would reduce their borrowing and financing costs. On the other hand, investors and pension funds would have more difficulty ensuring the minimum return of 1% imposed by the LPP, unless they increase their risk-taking.
An uncertain but possible decision
The possibility of a return to negative interest rates by the SNB remains uncertain but plausible. Inflation, the strength of the Swiss franc and the ECB’s monetary strategies are all variables that will determine the national bank’s final decision. One thing is certain, however: a return to negative rates will not be without consequences, and the SNB will have to carefully weigh the advantages and disadvantages before embarking on this path.
