Switzerland Faces Rate-Cut Dilemma Over Limited Easing Space

(Bloomberg) — Switzerland’s central bank is about to take another cliffhanger decision as officials weigh whether to use up one of their last interest-rate cuts before reaching zero.

While investors and most forecasters anticipate the Swiss National Bank to deliver a quarter-point reduction in the benchmark to 0.25%, a shifting backdrop has left the result on Thursday uncertain enough for UBS Group AG economists to describe it as “a coin toss.”

Tolerable low inflation, resilient economic growth, a weaker franc and limited policy space to fight strengthening speak in favor of leaving borrowing costs unchanged. But a rocky global trade environment threatened by US President Donald Trump’s tariffs could yet prompt a long-predicted cut.

The dilemma for officials led by Martin Schlegel is tough enough to make their decision by far the most suspenseful among advanced economies in a week when peers in the US and UK are widely expected to stay on hold. That would be typical for the SNB, whose whole cycle of hiking and easing since mid-2022 has kept investors on their toes.

“The only significant uncertainty to the view of the SNB holding rates steady at this meeting, for me, stems from a certain dimming of the global growth picture,” said Claude Maurer, chief economist of Basel-based BAK Economics. “This would speak in favor of a further cut.”

Maurer is one of just a handful of forecasters who predict no change in a Bloomberg survey. The rest reckon the SNB will lower its rate by a quarter-point, and traders assign a 75% chance of that outcome. Most economists say it will then stay at 0.25%.

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“We expect zero interest rate policy to be avoided, though a small degree of contingency remains should further easing become necessary.”

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It’s no easy task to second-guess the SNB, which notoriously jolted markets with its sudden imposition of a cap on the franc in 2011 followed by an even more abrupt removal in 2015. 

The SNB also surprised with its half-point hike in June 2022 before a 75 basis-point increase that was smaller than some investors had predicted. Economists then split three ways in advance of a half-point move at the end of that year. It unexpectedly held in September 2023, delivered an unanticipated cut in March last year, and a bigger-than-forecast half-point reduction in December.

And all that was before Trump’s arrival presented policymakers with what European Central Bank chief Christine Lagarde describes as “exceptionally high” uncertainty. No wonder UBS economists Maxime Botteron and Florian Germanier warned clients last week that “it will not become easier to forecast” SNB decisions.

It’s the worry that Trump might intensify trade tensions, hitting Swiss growth, that could speak for a reduction. His threatened tariffs on pharmaceuticals would hurt an export-dependent country where they accounted for 35% of sales abroad last year. 

Even without that happening, SNB officials “can’t be content” with a mid-term inflation forecast of just 0.7% in the third quarter of 2027 and should act to prevent expectations settling too low, according to Karsten Junius, the chief economist at Bank J Safra Sarasin.

“With a cut, policymakers can ensure they reach their goal,” he said. “If they pause, they can only hope that they reach their goal.”

A related concern is tactical: by shirking from a reduction, the SNB’s quarterly decision schedule effectively forces it to wait until June to avoid the impression of a panic response. 

In 2022, then-SNB President Thomas Jordan set a high bar for a move between gatherings when asked if a hike could materialize out of the blue. He suggested that only a complete change in the inflation outlook would justify that.

Tactics could also speak in favor of keeping rates unchanged, not least since the SNB has limited scope to ease further — essentially two quarter-point steps — before reaching zero and perching once again on the cusp of negative borrowing costs. Schlegel hasn’t ruled out subzero rates, but will only resort to them if necessary.

Among other arguments in favor of a hold are the latest readings of inflation, which has slowed but stayed in line with officials’ forecast. Meanwhile Switzerland’s economy sped up at the end of 2024 with the fastest growth in almost two years. 

That was helped by a pause in the appreciation of the franc, whose strength has long haunted exporters.

Since December, it has weakened by some 3% in real terms against a basket of currencies and it’s also down that amount against the euro. The franc held within a tight range until earlier this month when news of Germany’s historic plan to ramp up spending upended markets and sent it to its lowest since July. 

The prospect that the ECB could pause easing in April means that the difference between rates might stay stable, lessening additional pressure on the Swiss currency before the next meeting in June. 

The SNB’s quandary is likely to keep investors on edge this week. Given the tortuous backdrop, doing nothing might be the easiest option, according to GianLuigi Mandruzzato, senior economist at EFG Bank in Zurich.

“At a time of high uncertainty, it’s sometimes no harm to stay put and wait and see,” he said.

–With assistance from Harumi Ichikura, Aline Oyamada and Vassilis Karamanis.

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