While much of the developed world is still battling elevated inflation, Switzerland struggles with the opposite problem: deflation.
The country’s role as a safe haven has intensified in recent weeks. In a reversal of typical market behavior in the days following April 2, investors responded to US President Donald Trump’s aggressive trade rhetoric by dumping both US Treasuries and the dollar, fleeing what were once considered classic safe havens. Amid their search for shelter from volatility, demand for Swiss assets—most notably the franc and Swiss sovereign bonds—surged.
While this has strengthened Switzerland’s reputation as a low-risk refuge, it has also created a dilemma for the Swiss National Bank, which now faces the dual challenge of managing currency strength, which is hurting its export-reliant economy, and fending off deflation as imports into Switzerland become cheaper.
Switzerland’s two-year government bonds now offer negative yields, with some investors expecting a return of negative interest rates in the country.
Switzerland Interest Rates Could Hit 0%
The next SNB meeting on June 19 could be pivotal. A rate cut by 0.25 percentage points to 0% appears likely, with a real chance of negative rates returning soon.
SNB’s Tools Tested as Dollar Weakens
In 2025 so far, the Swiss franc has appreciated more than 7% against the US dollar, while it has remained roughly stable against the euro. The USD/CHF exchange rate fell from 0.8814 on April 2 to 0.8145 on April 14, surprising investors who would typically expect the dollar to rise in times of geopolitical stress.
Economists at UBS remain bearish on the US currency over the medium term. “We anticipate renewed dollar weakness as the US economy slows and focus shifts to the US’s large deficits,” they said on May 12.
“Since Liberation Day, the outlook for the dollar and US Treasuries has become far more uncertain,” says Martina Honegger-Romahn, lead portfolio manager for fixed income at Allianz Global Investors.
“It is unusual for the dollar to weaken and Treasury yields to rise in times of heightened risk, and this is also a new situation for the SNB.”
“When the SNB previously struggled with the problem of a stronger franc, it was able to intervene in the foreign exchange market against the weak euro. Now, however, now the dollar is weak. The SNB cannot win here, because the dollar foreign exchange market is too large. The SNB would therefore have no choice but to cut interest rates further in order to weaken further inflows into the franc.”
Is Switzerland a Currency Manipulator?
In addition, the central bank’s potential purchases of the foreign currency would further expand the SNB’s balance sheet, notes Valentino Guggia, economist at Migros Bank.
“This could have political consequences: the SNB’s annual results would be even more exposed to fluctuations on the financial markets,” he says, highlighting dividends as one issue.
“In a negative year, large losses could push the SNB’s equity into negative territory, potentially undermining the institution’s credibility. In addition, the US government could accuse Switzerland of being a ‘currency manipulator’ with uncertain consequences.”
Switzerland was branded a “currency manipulator” by the US Department of the Treasury in December 2020, citing factors including its large trade surplus with the US. The step was reversed under the Biden administration in April 2021, which accepted that the pandemic had created a special environment in which trade flows were distorted.
The SNB is prepared to intervene in the foreign exchange market if necessary, Guggia adds, though this instrument has been used only rarely in recent times.
Switzerland on the Verge of Deflation
April’s inflation data confirmed what markets had suspected: Switzerland is once again flirting with deflation. Headline CPI came in at 0.0%, pulled lower by falling energy prices, a strong franc reducing import costs, and weakening domestic inflation dynamics.
“The risks to inflation are clearly tilted to the downside due to the strong Swiss franc and falling energy prices,” Guggia says. “In addition, domestic inflation is gradually easing.”
Despite reporting strong GDP growth of 0.7% in the first quarter of 2025, the Swiss economy is showing early signs of cooling. Exports remained robust between January and March, but many economists suspect this reflects front-loaded shipments ahead of tariffs. Since April 9, a 31% US surcharge has applied to Swiss-origin goods, with pharmaceuticals—Switzerland’s top export sector—explicitly targeted by Trump’s push to lower US drug prices.
Swiss Sovereign Bond Yields Turn Negative
Swiss government bond yields have also responded to shifting expectations. In early May, yields for short maturities fell below zero for the first time in years, reflecting safe-haven demand and speculation around looser monetary policy; buying bonds drives up prices and pushes yields down. Yields are now negative for maturities up to four years, while longer-dated bonds remain slightly positive. The 10-year yield briefly dropped to 0.14% on May 7, but has since rebounded to 0.34%.
Will the SNB Cut Rates on June 19?
The SNB’s decision-makers next meet on June 19. Migros’s Guggia believes the central bank will be decisive: “Our base case is a cut to 0% in June. The outlook beyond that depends largely on the evolution of the US trade dispute, which strongly affects the external value of the franc. For the time being, we do not expect a return to negative interest rates.”
But Allianz Global Investors expects negative interest rates to return. “We expect a return to negative rates by September,” Honegger-Romahn says.
“Depending on how the dollar and tariffs evolve, a cut below zero could even come as early as June.”
Markets are also factoring in the SNB’s infrequent meeting schedule, with just four regular monetary policy decisions per year. That raises the risk of unscheduled interventions if financial conditions deteriorate.
“An emergency cut was under consideration shortly after Liberation Day,” Honegger-Romahn says. “Extraordinary decisions can’t be ruled out.”
Since 2000, the SNB has taken interest rate decisions outside its regular meeting cycle around 10 times.
For now, both Guggia and Honegger-Romahn agree that emergency intervention in the foreign exchange market remains unlikely. “That would signal a true crisis,” said Guggia. “We’re not there yet.”
What the Strong Swiss Franc Means for Investors
For investors from the eurozone and the US, the franc’s strength underscores the cost of safety—it can erode returns for investors who bought assets in currencies other than the franc. In addition, it can compress profit margins of Swiss companies going forward, with potential negative impacts on their stocks.
Still, Swiss bonds may offer diversification opportunities for fixed income investors looking for safety and capital preservation in an increasingly volatile global environment.
