From Safe Haven to Deflation Trap: Is the Swiss National Bank Forced Back into Negative Interest Rate Territory?

TradingKey – Ahead of its latest policy decision, markets had already priced in a 25-basis-point rate cut by the Swiss National Bank (SNB). This expectation was largely driven by Switzerland’s May annual inflation rate slipping into negative territory at -0.1% , with persistent weakness in tourism and oil prices signaling growing deflationary pressures . A slightly looser monetary stance has now become the market consensus.

[Swiss National Bank Interest Rate, Source: FX Financial]

As one of the world’s three major safe-haven currencies , the Swiss franc (CHF) has attracted significant inflows amid heightened global geopolitical tensions — such as escalating trade tariffs under the Trump administration — and rising economic uncertainty. This has led to a sustained appreciation of the Swiss franc.

By 2025, the USD/CHF exchange rate had fallen to as low as 0.80 , nearing its lowest level in a decade, with the franc appreciating more than 10% year-to-date . Such strength has weakened the competitiveness of Swiss exports and further intensified deflation risks.

In response to the ongoing downward revision in inflation expectations, the SNB also adjusted its future inflation outlook downward across all time horizons:

• 2025 forecast revised from 0.4% to 0.2%
• 2026 forecast lowered from 0.8% to 0.5%
• 2027 remains unchanged at 0.7%

This update confirms that underlying domestic price pressures remain subdued .

While growth forecasts still hover around the 1%–1.5% range , the SNB repeatedly emphasized in its statement that global economic conditions are highly uncertain . It pointed to the risk of renewed trade tensions and closely monitored how fiscal policy shifts might affect growth trajectories.

With the Swiss franc continuing to appreciate and divergence widening between European and U.S. monetary policy paths, the SNB has opted to maintain an accommodative stance , further distancing itself from the policy direction of other advanced economies.

As deflation risks rise , market participants widely expect the Swiss central bank may soon revisit the possibility of returning to negative interest rates , aiming to stimulate domestic demand and counteract the strengthening franc's impact on growth.