The Swiss central bank is in the spotlight this week as it meets to decide on its policy rate, which is expected to stay at 0% after recent cuts. This marks a shift from the negative interest rates used during the pandemic. Moving to a zero-interest rate policy shows a cautious approach, with a need for stronger indicators before considering negative rates again. Current market expectations suggest no further rate cuts this year, and any changes for next year are unclear. The strength of the Swiss franc is a key factor in this decision, especially since domestic inflation remains low.

Core Annual Inflation Impact

Recent data shows core annual inflation at 0.7%. While this isn’t high enough for immediate action, it’s close enough to be watched. If inflation drops below expectations, the central bank may reconsider its view on negative rates. Right now, market conditions hint that it’s easier to ease monetary policy rather than tighten it. A stronger currency could lead the Swiss central bank to adopt more lenient measures, as the franc remains strong against major currencies. With the Swiss National Bank likely to keep its policy rate at 0% this week, markets are preparing for a period with no changes. After six rate cuts since March of last year, taking a break seems reasonable. However, we see this as a calm moment before possible turbulence due to the Swiss franc. A major concern is the franc’s strength against the euro. The EUR/CHF exchange rate is close to 0.9300, which is near the lows seen in late 2022 when the economy faced significant stress. If the franc strengthens further, the SNB may have to respond, even if they’ve been hesitant to go back to negative rates.

Asymmetric Risk Profile In Derivative Markets

This situation is worsened by falling domestic inflation, which dropped to 0.7% in August 2025. This continues the disinflation trend from the 1.2% at the start of the year and is well below the SNB’s target. Low inflation gives policymakers both the reason and the space to act if the franc grows stronger. For derivative traders, this creates an uneven risk scenario in the upcoming weeks. With the market showing little belief in a rate cut, implied volatility on franc options is likely low. We see this as an opportunity to buy call options on pairs like EUR/CHF, especially if the SNB unexpectedly shifts toward easing. This strategy involves a clear, limited risk, which is just the premium paid for the options. The rewards could be significant if the SNB moves towards more aggressive easing or even signals a shift regarding negative rates. This would likely lead to a sharp fall in the franc’s value. The challenge for the SNB is that as the currency strengthens, it becomes more likely they’ll implement policies that weaken it. While the central bank might stand firm this week, underlying economic pressures are increasing. The path of least resistance seems to be toward a weaker franc, and derivative markets provide an effective way to prepare for that outcome. Create your live VT Markets account and start trading now.

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