Deflation in Switzerland: Is the SNB in ​​an interest rate trap?

Deflation in Switzerland: Is the SNB in ​​an interest rate trap?

Inflation in Switzerland reached a historically negative value of minus 0.1 percent in May 2025, which represents the first negative inflation value since March 2021. Inflation was already 0.0 percent in April 2025, and the development can be attributed to falling energy prices and declining rental inflation. The highest inflation value since the corona pandemic was recorded in the summer of 2022 at 3.5 percent, while inflation has been consistently below 1 percent since September 2024. Experts predict average inflation of 0.2 to 0.3 percent for the current year. ZKB expert David Marmet even expects inflation to be slightly negative in the coming months. The Swiss National Bank (SNB) faces a challenge as deflation can endanger demand, as vol.at reports.

The SNB recently cut the key interest rate by 25 basis points to 0.25 percent, a decision that will come into effect from Friday. This rate cut came in a context where inflation has fallen from 0.7 percent to 0.3 percent since the last interest rate decision. The franc remained stable against the euro as the interest rate cut was already expected. In a moderate economic climate, the SNB sees increasing downside risks to inflation, which influenced its decision to cut the key interest rate. Experts had expected such a rate cut, which could prove positive for mortgage holders as falling interest rates make loans more attractive. These relevant developments were highlighted by 20 Minutes.

Challenges for the SNB

With a view to the future, SNB President Martin Schlegel emphasizes that how the monthly inflation figures develop should remain unnoticed. In the coming months, a further cut in the key interest rate from 0.25 to 0.0 percent is expected at the next SNB meeting. Nevertheless, there are experts, such as Thomas Gitzel from VP Bank, who assume that the SNB will stick to zero interest rates. These uncertainties in monetary policy are further reinforced by the current market situation, while inflation remains under pressure and slight increases are on the horizon, influenced by investment in the EU, as reported by NZZ is forecast.

Analysts are wondering whether the SNB will have to return to negative interest rates in the near future to prevent further deflation. Inflation was recently at -0.1 percent year-on-year and core inflation rose 0.5 percent, fueling discussion about a possible return to negative interest rates. At the same time, gross domestic product growth in Switzerland remains at 1.1 percent, indicating an overall solid economic basis, albeit in a volatile international market.