By Amanda Cooper and Naomi Rovnick
LONDON (Reuters) -Switzerland could be the first big economy to return to negative interest rates to fight a surging currency and falling prices, highlighting how quickly central bankers may be running out of conventional policy tools as a global trade war rages on.
Data this week showing Swiss consumer prices fell in May prompted traders to prepare for the Swiss National Bank to cut its 0.25% benchmark rate to below zero, as it struggles to cool the red-hot franc.
In 2022, Europe’s central banks left behind a decade of below-zero rates that hurt banks and savers alike. Introduced to stimulate lending, negative rates turned money orthodoxy on its head by charging banks to park deposits with their central bank rather than paying them interest for doing so.
Many policymakers have since concluded they didn’t work as well as hoped, weighing on bank profits at a time when they needed to invest and pushing investors into riskier assets.
As Switzerland tries to stimulate its economy it is under scrutiny by the U.S. administration for how it deals with its currency, traditionally seen as a safe-haven in unstable times.
U.S. President Donald Trump’s trade war has raised the risk of inflationary pressures and slower growth – a nightmare combination for central bankers, politicians, businesses and households.
Complicating matters for non-U.S. policymakers is an across-the-board appreciation in tariff-sensitive currencies, from the euro and pound to the Korean won and Taiwan dollar, which hurts their respective exports and economies.
The Swiss franc has gained nearly 11% against the dollar in 2025, marking its best performance at this point in the year since 2011.
The problem the SNB and its peers face is that traditional policy tools, such as talking their currencies down or tinkering with short-term lending rates, are ineffectual in this environment.
“Drivers of inflation which lie out of the control of any central bank always cause them to get into a bad equilibrium or a policy error,” James Athey, fixed income manager at Marlborough, said.
The SNB “are bullied by the FX market into going to negative rates,” he said.
The SNB declined to comment on that notion, but separately on Friday said it would intervene in currency markets where necessary to keep inflation on track after Switzerland was added to a U.S. list of countries monitored for unfair currency and trade practices.
While other central banks are also dealing with the fallout of a weaker dollar, Switzerland has the lowest rates among big developed economies, followed by Japan, at 0.5%. Japan too is fighting to anchor inflation and the yen has gained 9% year-to-date.
DON’T BE NEGATIVE
Japan and euro zone governments plan huge spending packages that could stimulate growth and keep negative rates off the menu.
The European Central Bank on Thursday cut rates to 2% and traders expect just one more quarter-point cut this year. The Bank of Japan is still in tightening mode, even as it too has been stymied by uncertainty over tariffs.
“There are fairly good reasons to think that negative rates are not impossible over the next few years … but I just don’t think at the moment, unless there’s a big shift in the economic narrative, that we’re going to get even close to a point of negative interest rates anywhere apart from the SNB,” George Moran, European economist at RBC, said.
Trump has berated Federal Reserve Chair Jerome Powell for being too slow to loosen U.S. monetary policy, while other central banks cut rates.
Exchange rates are another bugbear: he has repeatedly called out China for keeping the yuan artificially low to keep exports cheap. Other countries that use currency intervention as a tool, such as Japan and Switzerland, also risk drawing Trump’s ire, exactly when they are racing to seal trade deals with him.
The U.S. Treasury Department on Thursday in its semi-annual currency report did not label Switzerland a currency manipulator, but it did add it to its “monitoring list” that includes China, Japan and Taiwan, among others.
The SNB on Friday said it did not engage in manipulation of the franc.
“It’s going to be difficult for them (Switzerland) to be overly aggressive on the currency, but they have been in the past,” Toby Gibb, head of investment solutions at UK fund manager Artemis, said.
“While the obvious thing these countries will want to do is devalue, that’s going to put them in the firing line,” he said.
Marlborough’s Athey said the rapid shifts taking place in the global economy is raising the risk of mis-steps.
“All that has to increase the chances that we don’t know, that we’re wrong. That’s all of us. Investors, central banks, everyone,” he said.
“We’re more likely to be wrong about where we are, where we’re headed and what the outcomes for economies, inflation and currencies will be.”
(Additional reporting by Karin Strohecker in London, John Revill in Zurich and Vidya Ranganathan in Singapore; Editing by Dhara Ranasinghe, Elisa Martinuzzi and Elaine Hardcastle)
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