Swiss central bank shifts into wait-and-see mode

The final cut for Swiss monetary policy?

The Swiss National Bank (SNB) took perhaps the final step in its current easing cycle, by cutting interest rates by another 25bps at its March policy meeting.

Having been the first major central bank to start easing rates a year ago, this latest quarter-point reduction brings its key interest rate to 0.25%. With Swiss monetary policy now slightly below its neutral rate and marginally in expansionary territory, the move could mean the SNB will also be the first of its peers to end this current round of easing.

Read also: What is the large Swiss rate cut signalling?

A cautious nod towards global uncertainty

The SNB’s accompanying remarks frequently cited the uncertain global economic environment. Board member Antoine Martin cautioned that: “The high level of uncertainty surrounding trade policy is likely to weigh on investment and on global economic momentum.”

He added: “Increasing trade barriers could lead to weaker global economic development. At the same time, a more expansionary fiscal policy in Europe could provide stimulus to the economy in the medium term.”

These words underline the input that politics now has on monetary policy. Since the SNB’s last meeting in December, economic tail risks now include the prospect of Trump tariffs on Swiss firms and products, which could be detrimental to the export-orientated economy. However, the huge German fiscal stimulus package should be a significant tailwind for Switzerland, due to the close trading arrangement between these two countries, as could the broader European re-armament deal currently being discussed.

As a result of these uncertainties, we believe the SNB has taken a wait-and-see position. In our view, it needs time to see whether the political efforts in Europe will stimulate demand and sentiment sufficiently in the short term to have positive effects in Switzerland as well. Similarly, it should also wait to see whether the US-led customs and tariff dispute will lead to a greater-than-currently-expected decline in demand. Calibrating monetary policy won't become any easier in an environment characterised by uncertainty, but the SNB has retained sufficient tools at its disposal to react appropriately.

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What might 2025 have in store for Swiss bonds?

11 March 2025

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Greater domestic clarity

From a domestic perspective, the SNB’s repeated mention of downside risks to inflation suggests that this is its biggest concern. However, we are more sanguine about the inflation outlook. While the pace of inflation decreased slightly from 0.7% in November to 0.3% in January, this decline was attributed to January’s fall in electricity prices and the central bank noted that inflation is still being driven by domestic services. The central bank’s conditional inflation forecast was little changed from the December reading. Our analysis of a set of underlying inflation drivers (Figure 1) highlights initial signs of pricing pressure, possibly due to inventories being restocked ahead of the implementation of tariffs, which should help stave off deflation for now.

FIG 1: Swiss PMI price components¹

Read also: Swiss bonds: the benefits vs foreign-currency bonds

Swiss growth also remains solid, even though below full potential, with the services sector and parts of manufacturing developing favourably in the fourth quarter. GDP for this year is forecast between 1% and 1.5% and the SNB’s expectations for 2026 have been released at 1.5%.

Finally, the Swiss franc has weakened in real terms since the last meeting. The CHF is a crucial driver of SNB rates, given the country’s reliance on exports and its status as a safe-haven currency. As Figure 2 illustrates, the currency’s trajectory had been steepening in the second half of 2024, but its recent decline shows that the central bank’s efforts to reverse this strength by maintaining a sufficiently large interest rate differential to other markets have paid off. Moreover, the weaker real exchange rate should also limit deflationary pressures.

FIG 2: Real effective exchange rate and currency interventions²

For now, we believe the SNB has reached its target in terms of interest rate policy. Since a further 25bps cut would bring interest rates down to zero, we feel any future actions will more likely be achieved through foreign exchange interventions, as the threshold for negative interest rates is likely to be relatively high.