Super-Strong Swiss Franc Pulls Economy Back Toward Deflation - And Puts the SNB on a Tightrope
June 07, 2025Deflation Returns
The price of that popularity is falling prices at home. Swiss CPI slipped below zero year-on-year in April - the first negative reading in four years. Inflation has slowed from 0.7 % last November to 0.3 % in February and finally 0 % in April, driven largely by cheaper electricity and other imported goods now denominated in a super-strong franc.
Policy Update: SNB Already Down to 0.25 % - Negative Next?
• In March 2025 the Swiss National Bank lowered its main policy rate by 25 basis points to 0.25 %, the fifth cut of this easing cycle.
• Futures now assign a roughly 35 % probability that rates will fall into negative territory before year-end.
• The Bank’s latest forecast sees inflation at 0.4 % in 2025 and 0.8 % in 2026-27 - numbers vulnerable to further CHF strength.
Between 2014 and 2022 the SNB ran the world’s deepest negative-rate regime at - 0.75 %. Experience showed that dropping below - 0.75 % simply pushes large depositors to store cash in vaults, so the effective lower bound is near.
Intervention Dilemma: Printing Money All Over Again?
When rates reach that floor, the classic SNB response is to sell francs and buy foreign assets. During the last cycle its balance sheet ballooned from about 100 bn CHF to 1.04 trn CHF - over 100 % of Swiss GDP. Although the portfolio has since declined to roughly 843 bn CHF, renewed intervention would send it higher again, with global consequences:
Euro-area bonds: Heavy Swiss buying typically compresses peripheral yields.
U.S. mega-cap tech: The SNB is a top-50 shareholder in Apple, Microsoft and Nvidia; more purchases could fuel further rallies.
Commodities: Any shift out of dollars can weaken the greenback and lift dollar-priced raw materials.
U.S. Treasury’s “Currency Manipulator” Sword
A major obstacle to fresh FX intervention is political. Switzerland already meets two of the U.S. Treasury’s three manipulation criteria - a large bilateral surplus with the United States (≈ 26.9 bn CHF in 2023) and a current-account surplus (~3 % of GDP). A third criterion - sustained one-way intervention - would trigger if the SNB renews large franc sales.
Analysts at ING argue this is why the Bank has tolerated the latest CHF surge: it prefers to exhaust interest-rate cuts first, hoping to avoid harsh U.S. tariffs that could climb as high as 32 %, the steepest in the OECD.
Global Ripple Effects
Euro Bonds - Additional SNB demand could knock Italian and Spanish yields lower, complicating the ECB’s tightening path.
U.S. Equities - More Swiss money flowing into Big Tech would add incremental bid pressure on already stretched valuations.
Commodity Spike - Diversifying away from dollars may boost oil and gold prices, exporting inflation to other economies.
EM Carry Trades - Deeper negative rates revive CHF-funded carry, sending hot money into emerging-market debt.
Can the Franc Weaken Naturally?
A significant rebound in the U.S. dollar or a geopolitical thaw could slow safe-haven flows, but those scenarios look remote. The currency’s upward momentum appears self-reinforcing: higher CHF drives deflation, which in turn signals even looser Swiss policy, encouraging more inflows.
Practical Takeaways for Cross-Border Earners
Set rate alerts at 0.93–0.95 EUR/CHF. A surprise SNB cut or verbal intervention often knocks 1-2 % off the exchange rate within hours.
Stagger conversions. Splitting monthly transfers into two tranches reduces timing risk.
Diversify savings. Holding part of your buffer in EUR or USD hedges against a sudden franc pullback if large-scale intervention returns.
Conclusion: SNB Caught Between Deflation and Diplomacy
The Swiss central bank must choose: endure deflation and slower growth, or intervene and risk U.S. retaliation. Either path could reshape global bond yields, tech-stock valuations and commodity prices. For anyone paid in CHF but spending in EUR, active currency management remains the best defence against the franc’s unpredictable might.