US tariff policy strengthens the franc Is the SNB now responding with an emergency interest rate cut?

With the turbulence surrounding US tariff policy, the Swiss franc has gained massively in strength. This is not all good news. In order to keep the economy stable, the SNB is talking about cutting interest rates.

An inflation rate of between 0 and 2 percent is considered ideal for the economy. It ensures that prices remain stable overall. This prevents deflation (falling prices), which can be dangerous for the economy because consumers are then more likely to postpone purchases and companies have less income. Moderate inflation, on the other hand, encourages people to spend or invest money instead of hoarding it. Because when purchasing power slowly decreases, saving is less attractive - consumption and investment increase. This is good for the economy.

However, inflation in this country fell to 0.3 percent in March. The Swiss franc is once again living up to its reputation as a "safe haven" in uncertain times: it has made massive gains in recent days, particularly against the weakening US dollar. At midday on Friday, the dollar was trading at just 0.8154 francs, after the US currency had been quoted at 85 centimes on Thursday morning. However, the euro also remains weak against the Swiss currency at 0.9263 francs.

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Especially in the export industry, the appreciation of the franc acts like an additional tariff because it minimizes margins. This is why the strong franc is putting pressure on the Swiss National Bank (SNB). Speculation on the market is increasing as to whether and when the central bankers might intervene. On the other hand, the run-up in the franc also shows that currency traders currently see only a limited risk of SNB intervention, according to a commentary by the Dutch ING Bank.

Swiss National Bank as a currency manipulator?

If the SNB were to weaken the franc through unilateral currency interventions, alarm bells could go off in the US government, they say. There is a risk that the Swiss National Bank could then be pilloried as a currency manipulator. This could undermine Switzerland's current negotiations with the US government for favorable tariff conditions.

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As long as the key interest rate is in positive territory, the SNB would rather lower interest rates than intervene in the foreign exchange market anyway, according to an analysis by UBS economists Maxime Botteron and Florian Germanier. "As the key interest rate is currently at 0.25 percent, it could still be too early to buy foreign currencies."

According to the UBS experts, if the Swiss franc does not weaken, the SNB is likely to cut interest rates at its next assessment in June. They expect the key interest rate to be cut by 25 basis points to 0 percent. The arguments in favor of such a rate cut would be further strengthened if the European Central Bank (ECB) were to ease its monetary policy quickly in April.

Emergency interest rate cut as the most radical option

However, the "most radical" option of an emergency interest rate cut outside the regular SNB meetings would also remain. According to UBS economists, the SNB resorted to such a measure a total of ten times between 2001 and 2015, usually due to a rapid appreciation of the Swiss franc against the euro.

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For the UBS economists, such an emergency interest rate cut would mean that the SNB sees "particularly negative potential consequences for Swiss inflation and growth" due to the escalation of trade conflicts. This would open the door to additional easing measures, not least a direct reduction of the key interest rate into negative territory.

The Swiss National Bank, meanwhile, is keeping quiet about these kinds of scenarios: They make "no comment", an SNB spokesperson said on Friday.

with material from the news agency sda