Prudent Swiss central bank focuses on the franc amid uncertainty

Wait-and-see mode for monetary policy makers

The ongoing conflict in the Middle East has made the global economic outlook considerably more uncertain. Market expectations and reactions to rising energy costs have been stagflationary amid concerns that inflation could resurface and growth may weaken. During a busy week of central bank policy decisions, this lack of clarity has forced many to take a wait-and-see position.

For the Swiss National Bank (SNB), the market already had low expectations of an interest rate cut, given that monetary policy at 0% is already the lowest in the world. Consequently, the reaction to its decision to hold interest rates should be mild. The real interest in its latest policy announcement relates to the SNB’s medium-term outlook for growth and inflation, as well as its response to the recent appreciation of the Swiss franc.

Read more: Oil prices and the Middle East conflict: the economic shock investors should watch

Near-term economic pressures anticipated

In Switzerland, it could be argued that the oil price shock comes at a convenient moment. The nation has been struggling with disinflation for some time, so rising energy prices – even if they only prove to be transitory – have alleviated concerns that the central bank may be pushed to take monetary policy into negative territory to combat deflation.

In its latest forecast, the SNB cautioned that inflation is likely to increase more strongly in the coming quarters, but due to the downward pressure from the stronger Swiss franc, inflation would be little changed over the medium term. It anticipates average annual inflation to be 0.5% for 2026, 0.5% for 2027 and 0.6% for 2028.

FIG 1: Energy contribution to Swiss CPI and the price of crude oil¹

The situation in the Middle East could present a greater setback for growth in Switzerland by curbing global economic activity. With oil and gas prices rising in the near term, consumers will also have less disposable income and are likely to rein in discretionary spending. At the same time, an appreciating currency also weighs on exporters, as their products become more expensive for overseas buyers. The central bank warned that short-term growth may be rather subdued, but an upturn is expected over the medium term. It currently sees the economy growing around 1% this year, followed by 1.5% in 2027.

Currency intervention is first line of defence

In times of uncertainty, the Swiss franc is seen as a safe haven. Since the SNB’s last policy meeting in December 2025, the currency has increased by around 2.5% on a trade-weighted basis. While currency appreciation reduces imported inflation, it also dampens economic activity, and the SNB acknowledges that a rapid and excessive appreciation of the Swiss franc poses a risk to price stability.

The recent appreciation should be within the SNB’s range of tolerance, in our view. However, at its latest meeting, the central bank understandably reinforced the message that it was willing to intervene in the foreign exchange (FX) market if needed.

FIG 2: Performance of the trade-weighted Swiss franc since the December monetary policy assessment²

We see the primary goal of any currency intervention as dampening FX volatility rather than structurally driving the currency lower. In this light, the SNB should avoid renewing accusations of currency manipulation that have been directed towards Switzerland in the past, notably from the first Trump administration. Such action should also remain within Switzerland’s diplomatic pledge to the US in September 2025 to avoid explicit efforts to cap the franc’s strength other than for inflation-fighting reasons.

Read more: Swiss Franc Credit Bond: a reliable record of outperformance

Advantageous interest rate differential

Looking ahead, we do not see the SNB taking any further action to change monetary policy this year.

Swiss interest rates are already significantly lower than in other countries, and even though the Federal Reserve and the European Central Bank both held interest rates this month, markets have started to reprice expectations in a more hawkish direction (particularly in Europe). This means Switzerland should continue to benefit from a large interest rate differential making its assets less attractive to international investors, although a resurgence of demand for safe-haven assets cannot be ruled out if the conflict in Iran escalates.

Despite the uncertain outlook and associated increase in currency volatility, we believe the SNB can afford to look through the oil and gas price shock to focus on any slowdown in economic output and maintain a wait-and-see approach in terms of monetary policy.