On Thursday, the SNB is expected to cut its key interest rate by another 25 basis points, bringing it back to zero.

While the era of zero interest rates seems to be over in developed countries (even in Japan!), Switzerland finds itself in a somewhat unique situation.

Back to the future

In May, inflation fell back into negative territory for the first time since March 2021. Unlike in the US and Europe, the wave of inflation in 2022-2023 has been fairly moderate. Inflation peaked at 3.5% in mid-2022. At the same time, inflation exceeded 9% in the US and even 10% in Europe.

Annual inflation. Source: Swiss Federal Statistical Office, Trading Economics

The return to negative inflation is the result of falling energy prices and the strength of the Swiss franc in recent months.

It should be noted that Switzerland has a slightly different inflation target than the traditional 2% target of other major central banks. The SNB's target is inflation of between 0 and 2%.

With inflation already below target, this week's rate cut may not be enough, and a return to negative rates is already being discussed. Looking at market expectations, a further rate cut is anticipated this year.

Don't play too much with the currency

In theory, rate cuts should also lead to a decline in the currency. A currency that continues to appreciate risks penalizing exports. But given the current level of rates, there is little leeway in this respect.

The other solution to weaken the Swiss franc would therefore be to intervene in the FX market. However, this could be frowned upon by the US. In early June, Switzerland was reinstated on the list of countries suspected of currency manipulation.

Switzerland should instead seek to avoid any friction with the Trump administration, as the country wants to conclude a trade agreement with the US that would allow it to avoid the 31% reciprocal tariffs imposed on April 2, which were then suspended for 90 days.