The Swiss National Bank (SNB) is nearing a move towards negative interest rates as a response to decreasing inflation pressures. These rates were previously a useful tool, but the bank acknowledges their undesirable effects.

SNB also noted that the global economic outlook is fraught with uncertainty, with expectations of Swiss economic growth slowing for the rest of 2025. The increase in trade tensions has worsened the global outlook and raised financial market volatility.

Interest Rate Challenges

In Switzerland, the interest rate environment poses challenges, impacting banks’ profitability. The USD/CHF exchange rate remains stable at 0.8190.

What the existing information suggests is that monetary policy in Switzerland is on the verge of shifting, again acknowledging deflationary undercurrents. The Swiss National Bank is preparing to implement negative interest rates once more, despite its reservations. Such rates, although once considered an effective measure against persistently low inflation, have known side effects especially felt across banking returns and liquidity management.

The global scene isn’t helping either. The SNB highlighted rising trade tensions, which feed into overall unpredictability and shake financial market conditions. This filters directly into asset repricing, risk appetite fluctuations, and wider economic sentiment, becoming harder to forecast. We’re not dealing with theoretical risk – this turbulence has real implications for volatility levels, pricing behaviour, and how capital responds across timeframes.

Domestically, rate levels remain a challenge. Interest rates, already at low levels, could slide lower. This isn’t happening in isolation – it’s hitting margins, especially where net interest returns are compressed for an extended period. From our standpoint, it subtly redefines how short-term directional trades behave on interest rate-linked products like FRAs, swaps, and STIR futures.

Central Bank Guidance and Market Reactions

The central bank has taken note of slowing internal growth forecasts heading into the later part of next year. When combined with commentary about weaker global demand, this suggests forward guidance from the bank may lean further into caution. For us, it alters curve positioning straightaway – steeper at the long end, but a softer tone in the short end, which isn’t yet fully priced through.

The foreign exchange element, meanwhile, appears remarkably stable. With USD/CHF holding firm at 0.8190, market participants seem unconvinced by broader USD shifts. That tells us something about where currency hedging activity is sitting and how deeply policy expectations are priced in elsewhere. Still, the quietness can be misleading, and adjustments may bite when carried interest or funding signals alter as a result of new policy triggers.

Vol sellers may wish to monitor shifts in implieds, particularly if thin liquidity amplifies moves over the short horizon. Watch for gaps between policy talk and front-end pricing – these offer exploitable dislocations. At the same time, the flattening pressure across curves should be managed cautiously since some of this is being driven by risk-off motives rather than sheer rate expectation.

Until the SNB signals more openly one way or another, pricing reactions may stay hesitant. We can, though, expect that once discussions move beyond words, the repricing will be sharp, especially across the short tenor segment.

Create your live VT Markets account and start trading now.