Martin Schlegel, the President of the Swiss National Bank (SNB), recently emphasized that reintroducing negative interest rates is unlikely due to their negative effects on savers and pension funds. Currently, the policy rate is at zero, so the bank is cautious about making any changes. Negative rates would only be considered in exceptional cases, taking into account factors like US tariffs and domestic inflation. In June, the SNB cut rates to zero, continuing a series of reductions that started in March 2024. Most market analysts believe this policy will stay the same until at least 2026. Inflation is slightly positive and matches the bank’s expectations. Schlegel justified the earlier cuts, saying they prevented more drastic actions, but acknowledged that this limits the SNB’s ability to respond to the effects of US tariffs.

Swiss Franc Stability

The SNB’s reluctance to bring back negative interest rates indicates that the Swiss franc is likely to remain stable in the next few weeks. Schlegel’s statements effectively set the policy rate floor at zero, unless we face a severe economic crisis. This stability suggests that implied volatility in franc options will stay low, making strategies aimed at profiting from low volatility, like selling strangles on EUR/CHF, attractive. Recent economic data supports this view. August’s Consumer Price Index (CPI) numbers showed inflation at just 0.8% year-over-year, which is comfortably within the bank’s target range and provides no reason for a rate hike. Additionally, the slow GDP growth of 0.3% in Q2 means the SNB has little motivation to change rates, keeping short-term interest rate futures stable.

Potential Risks and Market Reactions

The biggest risk to this steady outlook is the possibility of new U.S. tariffs, which could significantly impact Swiss exports. We are monitoring the White House’s review of tariffs on Swiss watches and pharmaceuticals closely, as this could lead to a surge in demand for the franc as a safe haven. For traders, selling short-term volatility might be appealing, but it would be wise to consider holding some inexpensive, longer-term call options on CHF to guard against this specific political risk. Reflecting on the rate cuts that began in March 2024, it’s clear that decisive action from the SNB could weaken the franc, but that trend has stalled since rates were set to zero in June. Current market pricing shown in SARON futures indicates that there is almost no expectation of a rate change until well into 2026. This broad consensus means that any unexpected announcement, particularly a sign of a more aggressive approach, could lead to significant market reactions. Create your live VT Markets account and start trading now.

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