The Swiss National Bank (SNB) may need to return to negative interest rates due to recent inflation trends. Headline annual inflation has fallen to zero for the first time since March 2021, and core annual inflation is also declining. Excluding rent, inflation is already in negative territory.

A stronger Swiss franc is exerting downward pressure on imported inflation, which has been negative for 18 months. The SNB must act to prevent a return to deflation, with their policy rate currently at 0.25%. A 25 basis point rate cut is expected at the upcoming 19 June meeting, but a 50 basis point cut remains a possibility.

Complicated Global Financial Outlook

The global financial outlook complicates the situation, with safety flows into the franc exacerbated by the dollar’s struggles. This places the SNB in a difficult position, potentially leading to a return to negative rates to manage these pressures. Intervention efforts might not suffice to control these dynamics. The SNB finds itself forced to act, as failure to do so could result in more severe consequences.

What we’re seeing here is a central bank under pressure to take swift and deliberate action. Inflation has reached a standstill, and when we strip out rent from the data, prices are already falling — a worrying sign. This could indicate the early stages of a broader deflationary spiral, something authorities in Switzerland have a history of tackling with strong monetary responses. The last time prices dipped this low, policymakers relied on negative rates to nudge the economy forward and maintain price stability.

Jordan’s team faces renewed pressure. The franc’s strength, especially over the past year and a half, has made imported goods cheaper. While that might sound positive for consumers, for monetary authorities it creates a drag on inflation at a time when domestic demand is not running hot enough to offset it. And while imported deflation has been a familiar companion for 18 months, it appears increasingly persistent.

We also have the added complexity of global rate divergence. The dollar, for example, no longer attracts the same safety flows as it once did. This boost to the franc increases the burden on the SNB, even though such capital movements are largely out of its direct control. Attempts to dampen the currency’s strength via asset purchases or verbal intervention have limits, particularly when markets can sense hesitancy or a lack of conviction from policymakers.

Risk Of Monetary Underreaction

Given how far below the SNB’s preferred inflation band current readings fall, the risk of under-reacting is clearly higher than doing too much. The base case is a quarter-point rate cut, but it’s becoming increasingly easy to justify a broader move. A half-point cut, while more aggressive, would send a clearer message. It would suggest that the SNB prioritises anchoring inflation closer to its target — and is willing to use all available tools.

From our perspective, the probability of such a rate reduction being repeated again before year-end seems non-trivial, particularly if the inflation trend continues its slide. So far, market pricing shows only a partial adjustment. Certain forward curves have flattened, but haven’t fully moved to price in this depth of easing.

For our part, we’ve already seen some flows into rates products linked to these contingencies. Short-dated volatility, particularly around SNB meetings, commands a premium — not because of unpredictability over the path, but due to questions over how far and how quickly the central bank is willing to go. The focus, very clearly, is on June. The messaging accompanying that move—if it materialises—will carry a great deal of weight. But the key for positioning is anticipating whether that shift resets broader expectations or merely responds to near-term data.

What to watch closely now is how the franc behaves in advance. If dollar softness continues, and the franc strengthens further, it might force the SNB’s hand sooner than initially anticipated. Markets aren’t always patient, and we believe timing matters more now than it did even a month ago. In this environment, opportunities exist across relative rate plays, especially where the timing of easing paths diverges. The data have spoken quite plainly, and what comes next depends almost entirely on how that message is received in Zurich.

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