What if Trump fires Chairman Powell?

Market participants fully anticipate the SNB to cut the policy rate by 25 basis points to 0.00% on June 19. Furthermore, the prices of futures contracts on the Swiss short-term interest rate point to a 25% probability that the policy rate will turn negative before year-end either following a 50 basis points cut in June or another 25 basis point reduction in the policy rate after the summer. 

However, with the economy growing above expectations in early 2025 and showing resilience in Q2 there is no urgency for the central bank to return to negative interest rates, an unpopular policy among the Swiss public.

The market expectation of a rate cut in June reflects the recent decline in inflation. Headline CPI fell 0.1% year on year (yoy) in May and core CPI, as measured by the Federal Statistical Office, rose only 0.5% yoy. The data up to May points to another undershoot of March SNB’s conditional inflation forecast.

Chart 1. SNB conditional inflation forecast (yoy)

Source: SNB and LSEG Data & Analytics. Data as of 17 June 2025.

The surprisingly low inflation in early 2025 was due to the unexpected weakness of petroleum product prices and the moderation in prices of tourism and other services. While the former shock can be overlooked, the latter may be a harbinger of a softening in domestic pressures on consumer prices.

Looking forward, the SNB is probably concerned by the above 4% rise of the Swiss franc trade weighted index since early April. The currency strength has likely had little impact on CPI so far but poses downside risks to inflation over the next several months.

Chart 2. Swiss franc exchange rates

Source: SNB and LSEG Data & Analytics. Data as of 17 June 2025.

A gradual rate cut, although already priced in, seems appropriate also to limit the risk of a further appreciation of the franc, at least in the short run. 

The SNB's cautious stance on monetary easing appears justified by the current growth outlook. Swiss GDP saw significant growth in the first quarter of 2025, likely driven by accelerated exports to the US to circumvent tariffs. Business surveys, along with consumer demand and job market data, suggest a slowdown in economic activity in the second quarter, but not a complete downturn.

Chart 3. Business confidence and GDP growth

Source: SNB and LSEG Data & Analytics. Data as of 17 June 2025.

The forecast for Swiss GDP is strengthened by expected higher fiscal spending in Germany, Switzerland's main export destination. The boost to Swiss growth from the eurozone's fiscal stimulus is likely to largely counterbalance the anticipated negative impact of Trump's tariffs, maintaining Swiss GDP near its potential.

After cutting the policy rate to zero on 19 June, the SNB will keep all policy options on the table, including negative interest rates and foreign exchange interventions. If the adverse consequences of US tariffs on growth were to prevail in the coming quarters, the risk of a prolonged period of negative inflation would increase strongly and the SNB would be forced to act. Adopting measures that are not welcomed by the Swiss public could become necessary to meet the SNB’s inflation target. 

To conclude, a 25 basis point cut in the policy rate to 0% is the most likely outcome of the next SNB meeting given the uncertain outlook. The options of negative interest rates and of currency interventions remain on the table and could be implemented depending on US trade policy, the eurozone fiscal boost and the strength of the Swiss franc.