Swiss National Bank Holds Interest Rate at Zero, Cuts Inflation Forecast

(Bloomberg) — The Swiss National Bank kept its interest rate at zero, judging that a weakened inflation outlook doesn’t yet justify a return to negative borrowing costs.

The decision on Thursday marks the second quarterly result with an unchanged benchmark, and matched the forecasts of all 23 economists surveyed by Bloomberg. Markets had also priced in only a very small chance of a cut.

“Inflation in recent months has been slightly lower than expected” though the outlook is “basically unchanged,” SNB President Martin Schlegel told reporters in Bern, despite presenting lower predictions for consumer-price growth for the next two years. “Our monetary policy is helping to ensure that inflation is likely to rise slowly in the coming quarters.”

The Swiss franc extended earlier gains to trade 0.2% higher at 0.9335 per euro after the decision. The currency gained 0.3% to 0.7979 per dollar, the highest since Nov. 18.

The outcome underscores how Schlegel and his colleagues are applying a higher bar to a move into negative territory than they would for a more conventional rate cut. With the franc touching recent decade-highs against the euro, and inflation at zero, the case for such a reduction under normal circumstances would have been more persuasive.

While the US Federal Reserve’s own quarter-point move on the eve of the SNB decision might have provided another pressure point to consider — given that it will narrow the differential between each country’s borrowing costs — the backdrop of rising global bond yields may have offered some comfort, as will the clouded prospects for US policy next year.

Faced with the trade-off between a feeble price outlook or taking a step of reintroducing the subzero policy that Switzerland had for seven years — a measure acknowledged to have hurt pensions, savers and the financial system — the SNB opted to stay steady this time round.

“The hurdle is higher for the introduction of a negative interest rate, but we are willing to implement it if required by our mandate,” Schlegel said, echoing prior statements.

What Bloomberg Economics Says…

“We expect communication and possible targeted FX interventions to take center stage in coming months, especially if the franc fails to depreciate materially. A more hawkish European Central Bank could support the SNB, even if this isn’t reflected in the FX forwards market yet.”

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

The Swiss central bank cut its inflation forecast to 0.3% next year and 0.6% in 2027, down from 0.5% and 0.7%, respectively. For this year, the central bank kept its projection of 0.2% unchanged.

The SNB decision “signals that it is prepared for a prolonged period of low inflation in the coming quarters,” said Karsten Junius, chief economist at Bank J Safra Sarasin. “Leaving policy rates at 0% now also implies that these low inflation rates will not be sufficient to trigger another rate cut.”

Consumer-price growth has now turned out weaker than economists expected for three months in a row. It slowed to zero last month, making a pickup for the current quarter that had been anticipated by the SNB almost certainly unachievable.

One challenge there is the franc. It surged to a decade high against the euro last month before then paring some gains. The currency’s strength weighs on prices by making imports cheaper.

The most recent driver of increases in the franc was the news that Switzerland had finally clinched a trade deal with the US after months of enduring the highest tariffs imposed on any advanced economy.

Given that backdrop, the SNB predicts growth of about 1% next year, compared with “just under” that number, anticipated in September. Still, Schlegel added that the US agreement won’t affect the outlook for consumer prices.

Emboldening officials in their tolerance of weak inflation readings, or even negative outcomes, is a target range of between zero and 2%, and the view that their current stance is expansive enough to stoke prices over time. Schlegel has also previously said that the SNB doesn’t have to react to every piece of monthly data.

“The SNB will continue to monitor the situation and adjust its monetary policy if necessary, in order to ensure price stability,” it said in its statement, reiterating its usual position.

–With assistance from Harumi Ichikura, Kristian Siedenburg, Alexander Weber, Alan Katz, James Regan and Vassilis Karamanis.

(Updates with Schlegel starting in third paragraph)

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