SNB Set to Avoid Negative Rate in Favor of ‘Lesser Evil’ for Now

(Bloomberg) — The Swiss National Bank is set to offer clues on just how high its bar is for a return to negative interest rates with a decision expected to keep them at zero.

Despite both a surge in the franc and the prospect of a cut in projections for inflation next year, officials are likely once again to avoid the big step of a reduction in borrowing costs below the lower bound.

That’s the consensus view of economists for the SNB’s decision on Thursday. They judge that policymakers won’t opt for a move that would inflict harm on Switzerland’s financial system — even though a shock outcome from a central bank notorious for jolting investors can never be excluded.

“If they want to surprise markets, they will cut,” said Nadia Gharbi, a senior economist at Pictet in Geneva. “But my baseline is that they stay on hold with a dovish tilt. Negative inflation — at least for a short time — is for the SNB the lesser evil compared to negative rates.”

A second quarterly decision to stay at zero, despite the deteriorating price situation, would be the most concrete illustration yet of how President Martin Schlegel and colleagues are applying stricter criteria than they normally would over a reduction in borrowing costs.

An unflinching posture would stand out all the more this week if the US Federal Reserve itself cuts rates, in a move that could keep up pressure on the franc because of the smaller differential between American and Swiss borrowing costs that would result.

SNB officials have repeatedly insisted that they’re prepared to return to the subzero policy Switzerland previously kept for seven years when it had the world’s lowest borrowing costs — but only if it’s really necessary. Such a measure hurts bank profitability, though policymakers have highlighted that it does work.

Observers reckon they won’t see the urgency for now. All 22 economists in a Bloomberg survey predict the central bank will avoid a cut, and investors likewise assign a probability of less than 10% to that prospect.

What Bloomberg Economics Says…

“The SNB is set to look through recent weakness in inflation and keep its policy rate unchanged at 0% at its December meeting. The hurdle to cutting rates in 2026 remains high given its limited policy space, while the price outlook is expected to slowly improve as energy prices bottom out and the effects of a strong franc fade.”

—Jean Dalbard, economist. For full preview, click here

The trade-off for the SNB centers on how far to tolerate a weaker inflation outlook. The risk is that feeble or even downward price developments could ultimately become self-fulfilling via consumer expectations.

What’s clear is that things don’t really appear to be going to plan. Every inflation reading since the September decision has surprised to the downside. Most recent was an outcome of zero for November which was a six-month low and at the bottom of the range of price stability that the SNB defines as between zero and 2%.

That makes it all but certain that the central bank’s prediction of a pickup this quarter to an average of 0.4% will fail to materialize. Back in March, it had even penciled in 0.6%.

While officials say they won’t get distracted by monthly numbers and have repeatedly forecast a pickup in inflation in due course, the strength of any snapback is in question. Multiple observers see the SNB being forced to cut its price outlook for next year, and Gianluigi Mandruzzato at EFG in Zurich predicts a reduction for 2027 too.

The extent of any change — down from its last prediction of 0.5% — will reveal how concerned policymakers are, according to Gero Jung, head of investment strategy at Banque Cantonale du Valais.

“If the annual expectation for 2026 goes to something like 0.2% or even closer to zero, that could be a signal that they are worried and could actually consider negative rates more seriously,” he said, cautioning that he doesn’t anticipate a substantial change in the price outlook.

The biggest weight on prices comes from the strong franc, which makes imports cheaper. It climbed to a decade high against the euro after Switzerland’s recent trade deal with the US, in its second peak in two months.

The problem for officials is that, unless they do cut rates — perhaps hoping for a lasting impact with a shock move — their alternative tool to contain the franc is interventions. But the effectiveness of such action is doubtful at present, and the SNB has generally shifted to more judicious confrontations with traders.

Supporting the case for no change on Thursday is a backdrop of unusual volatility for Switzerland at present, clouding the outlook. Aside from the gyrating franc, the economy also just suffered its first quarterly contraction in more than two years under the weight of the outsized US tariffs — an impact that could now unwind under the new accord.

Even so, some analysts reckon that the argument to go negative may end up strengthening, depending on how price growth turns out.

“If inflation stays low, it won’t be long before markets price in stronger expectations for rate cuts,” said Claude Maurer, chief economist at BAK Basel Economics.

–With assistance from Harumi Ichikura.

©2025 Bloomberg L.P.