By John Revill
ZURICH (Reuters) -The Swiss National Bank cut its interest rate to zero on Thursday in response to falling inflation, appreciation pressure on the Swiss franc and economic uncertainty caused by the U.S. administration’s unpredictable trade policy.
The SNB reduced its policy rate by 25 basis points from 0.25%, as expected by markets and a Reuters poll.
It was the central bank’s sixth rate cut in succession after it started reducing borrowing costs in March 2024.
The central bank now stands on the brink of returning to negative interest rates, a policy it maintained from 2014 to 2022, but which was unpopular with banks, savers and insurance companies.
“Inflationary pressure has decreased compared to the previous quarter. With today’s easing of monetary policy, the SNB is countering the lower inflationary pressure,” the central bank said in a statement.
The Swiss franc briefly strengthened after the decision, but retreated to trade steady on the day against the dollar a 0.8191 francs.
In its baseline scenario, the SNB said it anticipated that growth in the global economy would weaken over the coming quarters, while U.S. inflation was likely to rise. In Europe, by contrast, a further decrease in inflationary pressure is to be expected, it said.
The Swiss move comes on a busy day for central banks, with the Bank of England and Norway’s central bank also due to announce their rate decisions.
On Wednesday, the U.S. Federal Reserve held its interest rates steady and signalled borrowing costs could fall later this year, while the European Central Bank trimmed its interest rate by 25 basis points earlier this month.
The SNB’s rate cut came after Swiss annual inflation in May turned negative for the first time in four years, missing the central bank’s 0-2% target range.
“The SNB has cut rates because the franc is stronger and the economic outlook in Switzerland is weaker following the ‘Liberation Day’ tariffs,” said UBS economist Alessandro Bee, referring to sweeping tariffs U.S. President Donald Trump announced in April. “The SNB wants to prevent a further appreciation of the franc, which could help the Swiss exporters and also prevent inflation falling ever further.”
Although inflation was only slightly negative in May, the full impact of the rising franc on prices will only be seen in the next few months, said EFG economist GianLuigi Mandruzzato.
Mandruzzato said the SNB would now probably pause its rate cuts, unless there was a significant downturn in the Swiss economy caused by higher U.S. tariffs.
“They would be really happy to avoid going into negative interest rates,” he said. “For that to happen you would really need to see a real risk of deflation, with inflation lower than -0.5% for several months.”
However, Switzerland’s rate-sensitive two-year bond yield remained in negative territory, a sign that markets still anticipate a move in Swiss rates below 0% in the months ahead.
(Reporting by John RevillEditing by Dave Graham and Tomasz Janowski)
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