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As expected, the SNB conducted a further interest rate cut and lowered the Swiss policy rate to zero. It is now back on the verge of negative interest rates but is currently refraining from using this often-criticised instrument. Despite this move, the Central Bank significantly lowered its inflation forecast, with inflation dropping to nearly below the target range of 0%-2%. This suggests the decision was likely a close call for the SNB committee. Yesterday's decision by the US Federal Reserve to hold interest rates provided support to the SNB, allowing it to slightly reduce the key interest rate differential and make the franc somewhat less attractive relative to the dollar.
However, like the US Fed on Wednesday evening, the SNB emphasised the high level of current uncertainty. At the press conference, SNB Chairman Schlegel also highlighted the potential negative side effects of sub-zero interest rates, noting the challenges they pose for many economic actors. This cautious stance, consistent with the SNB’s repeated acknowledgment of the drawbacks of negative interest rates, suggests that a move below zero would only be considered if the inflation outlook were to deteriorate significantly.
We therefore assume that the SNB intends to keep the key interest rate at zero percent this year and we are not forecasting any further rate cuts. We share the view expressed by Jerome Powell, Chairman of the US Federal Reserve, that several global risks, for example from the Middle East or the trade dispute with the US, could lead to upward pressure on inflation. For this reason, a premature reduction in key interest rates into negative territory does not appear to be expedient at present.
