Bar remains high for negative Swiss interest rates

No change for Swiss monetary policy

Slower economic growth, rising unemployment and inflation dropping to 0% failed to sway the Swiss National Bank (SNB) into further monetary easing at this quarter’s meeting. The central bank’s decision to leave interest rates unchanged suggested that monetary policy at 0% was already sufficiently expansionary, as well as signalling that the bar for further interest rate cuts would remain high.  

Read more: 2026 investment outlook: striking a new balance

Inflation risks remain

Given inflation disappointed expectations in November by dropping from 0.2% in August to 0.0%, price stability was expected to be central to the SNB’s latest monetary policy decision. Despite clearly undershooting its target, the central bank sought to provide reassurance that annual inflation for 2025 was still within its comfort zone and would remain so for the next two years, forecasting inflation at 0.3% for 2026 and 0.6% for 2027.

Yet, examining the inflation data shows that prices remain persistently low and downward pressures are becoming more broad-based. Figure 1 presents the inflation picture by type for both goods and services. Traditionally, goods inflation has had a strong link to the strength of the Swiss franc; deflation in goods is, therefore, largely considered to be ‘imported’ when the currency appreciates quickly, resulting in imported goods costing less. Right now, however, the services side is also experiencing deflation, implying that lower prices are extending beyond goods only. This notion of deflationary pressures being both imported and domestic is further backed up by the origin of inflation.

Overall, the data signals a real risk that inflation could become more entrenched than what the SNB’s conditional inflation forecast suggests and may ultimately be the factor that forces the central bank to take a more aggressive stance.

FIG 1. Swiss inflation decomposition by type and origin¹

Better than expected external prospects

The growth outlook, on the other hand, has improved even though the Swiss economy contracted in the third quarter of 2025. This decline in GDP was attributed to the pharmaceutical industry, which had been pressured by uncertainty around US tariffs. In November, the Swiss government signed a trade agreement with the US that sees tariffs levied at 15%, down from the rate of 39% announced in the summer.

As well as fewer domestic concerns over trade, tariffs are proving to be less of a drag on global growth than many had feared and economies worldwide are demonstrating greater resilience than had been anticipated. While the global economy is still subject to significant risks, the somewhat better external growth outlook is deemed to be supportive for the Swiss economy. The SNB’s domestic forecast shows a slight improvement, with 2025 GDP at just under 1.5% and 2026 growth at 1%. However, the central bank did acknowledge that unemployment is likely to rise somewhat. 

Attractive interest rate differential

European Central Bank (ECB) president Christine Lagarde recently hinted that it is also poised to raise its growth forecast for the eurozone after its third-quarter performance surpassed expectations. Europe’s economic resilience in the face of greater trade pressures means the ECB is less likely to cut interest rates further; in fact, the ECB’s Isabel Schnabel signalled that the next rate move could actually be a hike.

With ECB interest rates likely to remain at 2% or above, versus 0% in Switzerland, the interest rate differential is expected to stay historically high, as shown in Figure 2. This should provide further wriggle room for the SNB, as Switzerland’s significantly less attractive interest rate acts as a headwind to inflows into Swiss assets and eases upward pressure on the Swiss franc.

FIG 2. Interest rate differential: eurozone vs Switzerland²

The Swiss currency has faced periods of tariff-related volatility throughout the year and reached a decade high against the euro in November following the trade agreement with the US. However, this appreciation hasn’t persisted and the currency has largely remained within the SNB’s area of comfort. That said, the central bank foregrounded its ongoing willingness “to be active in the foreign exchange market as necessary” in this month’s accompanying statement.

By and large, this quarter’s policy decision offered few surprises. The SNB remains committed to its policy stance, which it considers to be appropriately expansionary. Deflationary signals are not yet sufficient to warrant further action, particularly as the recent currency depreciation weakens the deflationary pressure on imports and the growth outlook has improved. The threshold for negative interest rates is not in sight, as yet.