Analysis-Why Switzerland's strong franc could lead it back to negative interest rates

Yahoo

14 hours ago

By Amanda Cooper and Naomi Rovnick
LONDON (Reuters) -Switzerland could be the first big economy to return to negative interest rates to fight a surging currency and falling prices, highlighting how quickly central bankers may be running out of conventional policy tools as a global trade war rages on.
Data this week showing Swiss consumer prices fell in May prompted traders to prepare for the Swiss National Bank to cut its 0.25% benchmark rate to below zero, as it struggles to cool the red-hot franc.
In 2022, Europe's central banks left behind a decade of below-zero rates that hurt banks and savers alike. Introduced to stimulate lending, negative rates turned money orthodoxy on its head by charging banks to park deposits with their central bank rather than paying them interest for doing so.
Many policymakers have since concluded they didn't work as well as hoped, weighing on bank profits at a time when they needed to invest and pushing investors into riskier assets.
As Switzerland tries to stimulate its economy it is under scrutiny by the U.S. administration for how it deals with its currency, traditionally seen as a safe-haven in unstable times.
U.S. President Donald Trump's trade war has raised the risk of inflationary pressures and slower growth - a nightmare combination for central bankers, politicians, businesses and households.
Complicating matters for non-U.S. policymakers is an across-the-board appreciation in tariff-sensitive currencies, from the euro and pound to the Korean won and Taiwan dollar, which hurts their respective exports and economies.
The Swiss franc has gained nearly 11% against the dollar in 2025, marking its best performance at this point in the year since 2011.
The problem the SNB and its peers face is that traditional policy tools, such as talking their currencies down or tinkering with short-term lending rates, are ineffectual in this environment.
"Drivers of inflation which lie out of the control of any central bank always cause them to get into a bad equilibrium or a policy error," James Athey, fixed income manager at Marlborough, said.
The SNB "are bullied by the FX market into going to negative rates," he said.
The SNB declined to comment on that notion, but separately on Friday said it would intervene in currency markets where necessary to keep inflation on track after Switzerland was added to a U.S. list of countries monitored for unfair currency and trade practices.
While other central banks are also dealing with the fallout of a weaker dollar, Switzerland has the lowest rates among big developed economies, followed by Japan, at 0.5%. Japan too is fighting to anchor inflation and the yen has gained 9% year-to-date.