Durrant Pate/Contributor

The Swiss National Bank (SNB) on Thursday cut its interest rate to zero, declaring it will not rule out returning borrowing costs to negative territory in future.

Acknowledging such a move would not be taken lightly, SNB reduced its policy rate by 25 basis points from 0.25 per cent, just shy of negative rates for the first time since 2022. The Swiss Central Bank now has the lowest borrowing costs among its peers, with markets giving a 53 per cent probability of further cuts in September.

Friday’s cut was the SNB’s sixth successive rate cut and came after Swiss prices fell by 0.1 per cent last month, its lowest reading in four years. The reduction was widely expected by markets ahead of the decision, after traders priced in an approximate 81 per cent chance of a quarter-point cut and around a 19 per cent chance of a bigger 50-basis-point cut.

The SNB lowered its policy rate to pull inflation back within its 0-2 per cent target range, which it defines as price stability, noting low inflationary pressure ahead. Negative interest rates, which the central bank last used between late 2014 and 2022, were unpopular with banks, savers and insurance companies. 

Reluctant to revive negative rates

As such, the SNB indicated that it would be reluctant to revive negative rates, as Chairman Martin Schlegel emphasised the negative side effects of sub-zero borrowing costs.  He noted that with rates now at zero, cutting rates again would be a more significant step than in other circumstances. 

According to Schlegel, “It’s very clear that negative rates would come with challenges and also side effects; for example, for savers, also for pension funds, and also for the real estate market. So we are well aware of the side effects. And, of course, we would not take this decision lightly.”

The Swiss franc briefly strengthened after the decision, but retreated to trade steadily on the day against the US dollar at 0.8191 francs. The central bank projects that the outlook on the world economy will remain subject to high uncertainty. Trade barriers could be raised further, leading to a more pronounced slowdown in the global economy, SNB noted.

The Swiss move comes on a busy day for central banks, with Norway’s central bank surprising markets with its first rate cut in five years, and the Bank of England kept its interest rate unchanged. 

Yesterday, the US Federal Reserve held its interest rates steady but signalled they could fall later this year, while the European Central Bank trimmed its interest rate by 25 basis points earlier this month.