Swiss National Bank Policy Outlook: Will Maintain 0% Policy Interest Rate
2026-09-19 01:02:10
Switzerland's recent economic growth has exceeded expectations, but inflation remains too low, and conditions are not yet ripe for monetary policy adjustments. The Swiss National Bank (SNB) is expected to maintain its policy rate at 0% next Thursday and will keep rates unchanged for the next few quarters. 
Swiss Economy Performs Better Than Expected The Swiss economy recently delivered a better-than-expected performance. Excluding the impact of sporting events, Switzerland's GDP grew significantly by 1.5% quarter-on-quarter in the second quarter. It's worth noting that this figure is not an annualized growth rate, making this increase particularly impressive. Growth was achieved across all sectors and demand components, corroborating improvements in various economic confidence indicators. However, this overall figure may exaggerate the true endogenous driving force of the economy. Nearly half of the quarter's growth came from the volatile chemical and pharmaceutical industries, while exports also surged. Therefore, economic growth is likely to slow in the second half of the year. Even so, the current economic performance is significantly better than market expectations from a few months ago. We have revised our average GDP growth forecast for Switzerland upward to 1.9% in 2026 and 1.6% in 2027. The upward revision is mainly due to the robust economic performance in the first half of the year, a recovery in external international demand, and the recent slight weakening of the Swiss franc. Supported by improved consumer spending and increased capacity utilization, domestic demand is expected to continue expanding. A strengthening economy does not pose an inflation risk. In our view, the economic recovery will not pose a significant threat to price stability. While the impact of the global energy shock is evident in Switzerland, its severity is far lower than in most other developed economies. Driven by rising global energy prices, Switzerland's overall inflation rose to 0.8% year-on-year in August, up from 0.4% in July, mainly driven by refined oil prices—which rose 25.2% year-on-year. Even with the rebound, inflation remains within the Swiss National Bank's 0-2% target range. More importantly, core inflationary pressures remain very weak. Excluding refined oil, Switzerland's inflation in August was only 0.3% year-on-year. This indicates that the energy shock has not yet evolved into a comprehensive price increase, and the second round of inflation transmission effects domestically is very limited. The strength of the Swiss franc continues to keep Switzerland's inflation level lower than that of its major trading partners. The appreciation of the local currency lowers the prices of imported goods, becoming an important buffer against global inflationary shocks. This mechanism is particularly prominent in Switzerland: imported goods account for approximately 22% of the weight of the consumer price index. This explains why, similar to 2022, the current energy shock has brought far less inflationary pressure to Switzerland than to other countries. However, in August, the inflation-suppressing effect of the exchange rate channel weakened compared to previous months. Since the Swiss National Bank's June policy meeting, the Swiss franc has depreciated moderately against the euro. This will bring some benefits to export companies and may also put slight upward pressure on import prices, but historically, the Swiss franc remains at a strong level. Inflation is expected to remain under control . Inflation is likely to remain moderate in the coming months. The Swiss government released its forecast yesterday, maintaining its prediction of an average inflation rate of 0.6% for both 2026 and 2027. This forecast is based on current energy futures price trends, which indicate that oil prices will decline in the near future. If oil prices fall as expected, the recent rise in overall inflation is likely only temporary. We believe that the Swiss National Bank may slightly raise its conditional inflation forecast, especially short-term inflation expectations, to reflect the recent rise in energy prices and the weakening of the Swiss franc. At its June meeting, the bank projected average inflation of 0.6% for 2026 and 2027, and 0.7% for 2028. A slight upward revision to the forecast is now almost certain, but we expect no significant changes to the medium-term inflation outlook. Core inflation remains low, domestic price pressures are manageable, and the transmission effect of the energy shock is very limited. In short, there are few signs that the Swiss National Bank (SNB) needs to adjust its policy rate. We expect the bank to keep the policy rate at 0% on Thursday and remain on the sidelines for the next few quarters, especially if global energy prices eventually fall as we expect. Therefore, the SNB is likely to continue to diverge from other central banks globally, maintaining a more accommodative monetary policy stance. This policy divergence stems from the domestic inflation environment in Switzerland, and low inflation is largely due to the continued strength of the Swiss franc. Foreign exchange intervention is a backup tool, but not the baseline scenario . Foreign exchange intervention will remain part of the SNB's policy toolbox. At the June policy meeting, the central bank specifically mentioned that it would respond to the rapid and excessive appreciation of the Swiss franc by buying foreign exchange. If risk aversion intensifies again, causing the Swiss franc to strengthen, suppressing import inflation and potentially triggering renewed deflation, the central bank may still resort to the aforementioned measures. Currently, the Swiss franc has weakened recently, and Swiss inflation remains lower than its trading partners, reducing the need for intervention. Therefore, the central bank is unlikely to intervene in every round of nominal exchange rate appreciation, especially given the relatively limited appreciation of the Swiss franc's real effective exchange rate. There is a clear asymmetry in the Swiss National Bank's policy communication. The central bank has not signaled that it will sell foreign exchange to push up the Swiss franc as it did in 2022 to curb imported inflation. With inflation firmly under control, there is no realistic reason to restart such foreign exchange sales intervention. Therefore, we believe the central bank will continue to maintain asymmetric policy guidance: it may still purchase foreign exchange in the event of a sudden, excessive appreciation of the Swiss franc; however, the possibility of systemic intervention or a return to the 2022 operational strategy is low. In summary, we expect the Swiss National Bank to maintain a 0% policy rate, with foreign exchange intervention remaining only as a targeted backup measure. As long as domestic inflation remains low and the Swiss franc remains strong but does not appreciate excessively, the Swiss National Bank can continue to implement a more accommodative monetary policy compared to most central banks.
Swiss Economy Performs Better Than Expected The Swiss economy recently delivered a better-than-expected performance. Excluding the impact of sporting events, Switzerland's GDP grew significantly by 1.5% quarter-on-quarter in the second quarter. It's worth noting that this figure is not an annualized growth rate, making this increase particularly impressive. Growth was achieved across all sectors and demand components, corroborating improvements in various economic confidence indicators. However, this overall figure may exaggerate the true endogenous driving force of the economy. Nearly half of the quarter's growth came from the volatile chemical and pharmaceutical industries, while exports also surged. Therefore, economic growth is likely to slow in the second half of the year. Even so, the current economic performance is significantly better than market expectations from a few months ago. We have revised our average GDP growth forecast for Switzerland upward to 1.9% in 2026 and 1.6% in 2027. The upward revision is mainly due to the robust economic performance in the first half of the year, a recovery in external international demand, and the recent slight weakening of the Swiss franc. Supported by improved consumer spending and increased capacity utilization, domestic demand is expected to continue expanding. A strengthening economy does not pose an inflation risk. In our view, the economic recovery will not pose a significant threat to price stability. While the impact of the global energy shock is evident in Switzerland, its severity is far lower than in most other developed economies. Driven by rising global energy prices, Switzerland's overall inflation rose to 0.8% year-on-year in August, up from 0.4% in July, mainly driven by refined oil prices—which rose 25.2% year-on-year. Even with the rebound, inflation remains within the Swiss National Bank's 0-2% target range. More importantly, core inflationary pressures remain very weak. Excluding refined oil, Switzerland's inflation in August was only 0.3% year-on-year. This indicates that the energy shock has not yet evolved into a comprehensive price increase, and the second round of inflation transmission effects domestically is very limited. The strength of the Swiss franc continues to keep Switzerland's inflation level lower than that of its major trading partners. The appreciation of the local currency lowers the prices of imported goods, becoming an important buffer against global inflationary shocks. This mechanism is particularly prominent in Switzerland: imported goods account for approximately 22% of the weight of the consumer price index. This explains why, similar to 2022, the current energy shock has brought far less inflationary pressure to Switzerland than to other countries. However, in August, the inflation-suppressing effect of the exchange rate channel weakened compared to previous months. Since the Swiss National Bank's June policy meeting, the Swiss franc has depreciated moderately against the euro. This will bring some benefits to export companies and may also put slight upward pressure on import prices, but historically, the Swiss franc remains at a strong level. Inflation is expected to remain under control . Inflation is likely to remain moderate in the coming months. The Swiss government released its forecast yesterday, maintaining its prediction of an average inflation rate of 0.6% for both 2026 and 2027. This forecast is based on current energy futures price trends, which indicate that oil prices will decline in the near future. If oil prices fall as expected, the recent rise in overall inflation is likely only temporary. We believe that the Swiss National Bank may slightly raise its conditional inflation forecast, especially short-term inflation expectations, to reflect the recent rise in energy prices and the weakening of the Swiss franc. At its June meeting, the bank projected average inflation of 0.6% for 2026 and 2027, and 0.7% for 2028. A slight upward revision to the forecast is now almost certain, but we expect no significant changes to the medium-term inflation outlook. Core inflation remains low, domestic price pressures are manageable, and the transmission effect of the energy shock is very limited. In short, there are few signs that the Swiss National Bank (SNB) needs to adjust its policy rate. We expect the bank to keep the policy rate at 0% on Thursday and remain on the sidelines for the next few quarters, especially if global energy prices eventually fall as we expect. Therefore, the SNB is likely to continue to diverge from other central banks globally, maintaining a more accommodative monetary policy stance. This policy divergence stems from the domestic inflation environment in Switzerland, and low inflation is largely due to the continued strength of the Swiss franc. Foreign exchange intervention is a backup tool, but not the baseline scenario . Foreign exchange intervention will remain part of the SNB's policy toolbox. At the June policy meeting, the central bank specifically mentioned that it would respond to the rapid and excessive appreciation of the Swiss franc by buying foreign exchange. If risk aversion intensifies again, causing the Swiss franc to strengthen, suppressing import inflation and potentially triggering renewed deflation, the central bank may still resort to the aforementioned measures. Currently, the Swiss franc has weakened recently, and Swiss inflation remains lower than its trading partners, reducing the need for intervention. Therefore, the central bank is unlikely to intervene in every round of nominal exchange rate appreciation, especially given the relatively limited appreciation of the Swiss franc's real effective exchange rate. There is a clear asymmetry in the Swiss National Bank's policy communication. The central bank has not signaled that it will sell foreign exchange to push up the Swiss franc as it did in 2022 to curb imported inflation. With inflation firmly under control, there is no realistic reason to restart such foreign exchange sales intervention. Therefore, we believe the central bank will continue to maintain asymmetric policy guidance: it may still purchase foreign exchange in the event of a sudden, excessive appreciation of the Swiss franc; however, the possibility of systemic intervention or a return to the 2022 operational strategy is low. In summary, we expect the Swiss National Bank to maintain a 0% policy rate, with foreign exchange intervention remaining only as a targeted backup measure. As long as domestic inflation remains low and the Swiss franc remains strong but does not appreciate excessively, the Swiss National Bank can continue to implement a more accommodative monetary policy compared to most central banks.
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