Stabilising the franc is now Swiss central bank’s priority

Swiss central bank diverges from wider hawkish shift

The Swiss National Bank (SNB) set itself apart from other major central banks at its June meeting by maintaining its expansionary monetary policy stance. In direct contrast with the European Central Bank’s (ECB’s) recent 25 basis-point interest rate rise, and the Federal Reserve’s hawkish tilt, the SNB left monetary policy unchanged at 0%. Moreover, the Swiss central bank reaffirmed its ‘increased readiness’ to intervene in the foreign exchange market to stabilise the Swiss franc.

An uncertain policy backdrop

The conflict in the Middle East has significantly transformed the global economic and inflation landscape since the start of the year. Economic momentum has slowed as the disruption to global trade caused by the closure of the Strait of Hormuz weighed on companies via higher production costs and dampened household spending. In particular, higher energy prices have threatened to trigger an inflation shock in Europe, prompting the ECB to adjust its policy course.

The Swiss economy has been relatively insulated from the inflation shock. Six months ago, the prospect of deflation was a genuine threat. Swiss inflation had fallen to zero and annual inflation was forecast at just 0.3% for 2026. Yet, higher prices for oil products and raw materials saw Swiss inflation reach 0.6% in May, pushing the annual inflation forecast to 0.6% for 2026, 0.6% for 2027 and 0.7% for 2028¹. Despite this rise, Swiss inflation remains relatively low by international standards and still lies in the lower-middle range of the SNB's price stability definition (0%-2%). So, for the time being, the diminishing risk of deflation has granted the central bank some breathing room and muted any discussion about the need to take interest rates into negative territory.

FIG 1. Swiss inflation has increased in 2026²

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During this period of uncertainty, the Swiss economy has proven to be resilient. First quarter GDP was solid, industry sentiment has been generally positive and the forecast for 2026 growth was unchanged at 1% (from the SNB’s December 25 meeting). Despite this stable economic environment, the labour market has deteriorated slightly. The unemployment rate edged up to 3.1% in May from 3.0% in April (on a seasonally adjusted basis)³ and has now been at or above 3% for the past six months. Right now, this deterioration should not be considered a cause for concern, but it is definitely a situation that the central bank will monitor closely and could provide a further reason for maintaining its expansionary policy stance. If anything, it lowers the risk of second-round effects and puts the current inflation backdrop in contrast with the post-COVID episode.

FIG 2. Swiss unemployment has climbed to 3.1%⁴

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Prioritising currency stabilisation

The main risk to the Swiss economic outlook continues to be developments in the global economy. The signing of a Memorandum of Understanding between Iran and the US should result in a more favourable economic and geopolitical backdrop, but the situation in the Middle East could worsen again and curb global economic activity once more. The SNB also cautioned that US trade policy continues to be a source of uncertainty.

Such ongoing ambiguity means that currency stability – or rather instability – is now the central bank’s biggest concern. A more benign market environment should unwind the demand for safe-haven assets, which has driven the Swiss franc higher. So far this year, the currency has gained nearly 1.4% against the euro⁵, an appreciation which represents a strong disinflationary force on the economy. In our opinion, focusing on the speed of the currency’s appreciation rather than the level itself makes sense, as the level of the real exchange rate, the measure the SNB favours, has been flat since the start of the year despite the appreciation of the nominal exchange rate at the same time.

Lasting peace in the Middle East should ease the ascent of the Swiss currency; slower demand could also be supported by the increased interest rate differential between Switzerland and the eurozone, following the ECB’s rate hike, which should disincentivise cash flows. Yet, with geopolitics remaining highly fragile, upward pressure on the Swiss franc could persist. With this in mind, SNB chairman Martin Schlegel reasserted the central bank’s increased willingness to intervene in the foreign exchange market. He pledged to “counter a rapid and excessive appreciation of the Swiss franc, which would jeopardise price stability in Switzerland”⁶.

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An adjustment in policy stance?

Looking ahead, we believe the SNB remains in a relatively comfortable position and we do not see the need for any further action to change monetary policy this year. If anything, this latest meeting signals a subtle adjustment by the central bank towards slightly higher interest rates in the medium term, further alleviating fears that the high bar required for negative interest rates may soon be tested. This scenario should be beneficial for the Swiss economy, as any future adjustment of interest rates would be triggered by its position of strength.