Opening the door wide to future rate rises
Finally, things are getting exciting again in the world of central banking. After the US Federal Reserve (Fed) and the European Central Bank (ECB) both initiated a change of course in their recent meetings, markets in Switzerland were already pricing in the first interest rate hikes for the Swiss National Bank (SNB) – albeit not until 2027.
Global growth indicators have risen significantly during the third quarter after a mixed first half of the year, nurturing increasing inflationary pressures. While higher prices stem partly from the geopolitical situation in the Middle East, solid GDP growth figures open the option of taking a little wind out of the sails of the economy without causing major damage. Many central banks have seized the opportunity and adjusted interest rates upwards, with possible further tightening to follow if the environment remains similar.
Against this backdrop, the Swiss bank did not yet turn the interest rate screw for the first time in this cycle, but instead kept its policy rate at 0%, while opening the door wide to a future hike, with a higher inflation forecast and firmer expected growth. As the Swiss franc has depreciated against the euro and dollar since the beginning of the year and the interest rate differential with the Fed and ECB continues to grow, we now believe a first interest rate rise from the SNB is likely in December.
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Capitalising on differentiation
With other central banks initiating a change of course, the SNB’s decision to keep calm and carry on has multiple benefits. Firstly, it moves the Swiss economy further away from the possibility of deflation, which was a real risk only nine months ago. Secondly, the larger interest-rate differential with the ECB and Fed helps to depreciate the Swiss franc. Finally, by supporting the economy, it reduces the risk of further softening the labour market. Swiss unemployment rates have remained at a seasonally adjusted level of 3.1% for four consecutive months compared to a post-COVID low of 1.9%. In this context, the SNB exploited the window of opportunity to keep rates differentiated from other markets for now.
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Setting up a future rate rise?
In our view, while muted enough to keep its options open, the SNB’s upward adjustment to its inflation and growth forecasts is notable. Switzerland’s strong currency, coupled with the economy’s minimal reliance on imported fossil fuels for power generation, better insulate it from inflation shocks than most countries.
However, higher prices for oil products and raw materials caused by disruption in the Strait of Hormuz have had an impact, with inflation rising to 0.8% year-on-year in August, approaching the midpoint of the SNB’s price stability definition of 0-2%. Switzerland’s unique environment means we see 1% as a key marker for inflation to begin to cause some concern. In this context, the bank’s latest forecast of 1.2% in 2027 on top of 0.9% inflation in 2029 sets the pretext for a rate rise sooner rather than later.
FIG 1. Swiss inflation (YoY) and SNB conditional inflation forecasts, June 2026 vs. September 20261
The SNB’s change in growth expectations is another signal that an interest rate rise may be on the way (Figure 2). While it spoke of “moderate growth for the coming quarters”, the bank recognised that Q2 expansion was solid and broad-based. The shift upwards in expectations for 2026 as a whole to between 1.5% and 2% puts growth close to levels that would be seen by some as the first signs of a potential need for corrective action – particularly because the Middle East conflict and the global trade policy environment act as current drags on growth.
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FIG 2. Swiss real GDP (YoY) and SNB growth estimates, March/June 2026 vs. September 20262
Currency appreciation appears less of an acute concern
In its announcement, the bank also slightly weakened its wording regarding willingness to intervene in the foreign exchange markets. At the June meeting, the SNB voiced an “increased willingness to intervene”, whereas by September it was “also willing to be active” in the currency market.
Switzerland’s safe-haven status makes the strength of the Swiss franc a recurrent concern for the country’s central bank, both in terms of exports and price stability. With interest rates as low as zero and Japan raising its rates significantly, there is a remote risk that the Swiss franc could replace the Japanese yen as the funding currency for carry trades going forward. Raising Swiss rates would send a clear signal to discourage this – and the change in wording around forex intervention is a first step in this direction. However, the Swiss currency’s trajectory has been clear since the first quarter of 2026, depreciating around 5% against the euro and 8% versus the dollar from its peak for the year. This provides some leeway to raise rates without risking excessive currency strength.
“In June, the SNB voiced an “increased willingness to intervene”, whereas by September it was “also willing to be active” in the currency market.”
A supportive overall environment
Overall, there is a supportive environment for the Swiss economy in general, with the growth engine humming along and inflation reasonably under control. Even if a first interest-rate hike is implemented in December, as things stand, the tightening would be done from a position of relative strength. And given that a neutral level for Swiss rates probably lies in the 0.5-1.0% range, they would still be in accommodative territory at that point.
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