Newsroom
In a surprise move, Switzerland’s central bank has slashed interest rates to zero, aiming to counter falling prices and slow the rapid rise of the Swiss franc, which has been drawing heavy investment as a safe-haven currency during global economic uncertainty.
The Swiss National Bank (SNB) announced Thursday it had lowered rates by 25 basis points to 0.0%, with signs it may go even further and dip into negative territory, something not uncommon in recent Swiss history. The goal: to prevent deflation, a phenomenon where prices fall and economic activity slows down.
“Inflationary pressures have eased compared with the previous quarter,” the SNB said, noting that cutting rates is necessary to “counteract headwinds” from declining inflation.
While many countries are still trying to bring down high inflation, Switzerland faces the opposite challenge. Consumer prices fell by 0.1% in May, raising concerns of a deflationary cycle. This isn’t new for the Swiss economy, which has dealt with similar problems over the past decade.
A major driver of this deflation risk is the strength of the Swiss franc. When markets are unsettled, investors flock to the franc as a safe haven, pushing its value higher. A stronger franc makes imported goods cheaper, lowering overall prices in Switzerland, where imports make up a large share of consumer spending.
“The franc always tends to strengthen in times of market stress,” said Charlotte de Montpellier, an economist at ING. “That strength lowers the cost of imports, which plays a big role in driving prices down.”
Despite the rate cut, the Swiss franc strengthened further on Thursday, frustrating policymakers and increasing expectations of deeper rate cuts, possibly down to -0.75%, if inflation doesn’t pick up.
“Negative rates can help weaken the currency, lower borrowing costs, and boost investment,” said Adrian Prettzion of Capital Economics. “But they’re not without risks.”
These risks include losses for savers, who may see their deposits shrink, and squeezed profits for banks, which earn less from lending. There are also concerns that prolonged negative rates could distort financial markets and threaten long-term stability.
What this means for Cyprus
Cyprus, with its close economic ties to Europe and a significant expatriate community from Switzerland, could see benefits from Switzerland’s move. A weaker Swiss franc may ease the cost of Swiss imports and investments in Cyprus, helping businesses and consumers.
Additionally, lower Swiss interest rates can make borrowing cheaper for Swiss investors and companies operating in Cyprus, potentially boosting investment and tourism. For Cypriots, this could mean more job opportunities and economic activity linked to Swiss businesses.
At the same time, Cyprus should monitor these developments carefully. The ripple effects of Swiss monetary policy show how interconnected global markets are, especially for small, open economies like Cyprus.
