One of the most famous lines in cinema is when Arnold Schwarzenegger in his role as The Terminator says “I’ll be back” I have had that feeling about negative interest-rates all through the claims by central bankers that they are now valiant inflation fighters. This morning we edged nearer although not literally.
The Swiss National Bank is leaving the SNB policy rate unchanged at 0%.
So after a sequence of 6 interest-rate cuts we are holding at 0% but it feels like a rest rather than a change when you read this bit.
Global economic growth slowed somewhat in the first half of 2025. Global economic developments are being dampened by US tariffs and ongoing high uncertainty.
In its baseline scenario, the SNB anticipates that growth in the global economy will be subdued over the coming quarters.
As an aside we see what has become a central banker buzz phrase.
The scenario for the global economy remains subject to high uncertainty.
On their track record I guess they have a point. But the reality is that this is a constant in the modern era. Then we get to what points to more negativity.
Economic growth in Switzerland was weak in the second quarter. After increasing strongly in the first quarter, GDP expanded by just 0.5%. The major fluctuations in the first half of the year were principally due to the pharmaceuticals industry.
If we look at the actual figures for 2025 we see this.
Bern, 28.08.2025 — In the second quarter of 2025, Switzerland’s GDP adjusted for sporting events increased by 0.1%, following growth of 0.7% in the first quarter
I think that is the first time I have seen national GDP adjusted for a sporting event as usually in the case of an Olympics for example we have to adjust for ourselves. But as you can see a familiar pattern of a Trump Tariff high followed by a hangover which is expected by the SNB to be followed by this.
The economic outlook for Switzerland has deteriorated due to significantly higher US tariffs. The tariffs are likely to dampen exports and investment especially. Companies in the machinery and watchmaking industries are particularly affected.
Then we get to the economics money shot.
The SNB continues to expect GDP growth of 1% to 1.5% for 2025 as a whole. As a result of the tariffs and the high level of uncertainty, the SNB expects growth of just under 1% for 2026. In this environment, unemployment is likely to continue rising.
At this point I am thinking that they could easily have cut interest-rates this morning but chose not too. I will come to why in a moment.
Inflation
Here we have an unusual situation.
The forecast is within the range of price stability over the entire forecast horizon (cf. chart). As in the previous quarter, it puts average annual inflation at 0.2% for 2025, 0.5% for 2026 and 0.7% for 2027 (cf. table). The forecast is based on the assumption that the SNB policy rate is 0% over the entire forecast horizon.
Not only is inflation under control but they have pretty much stable prices something of which I if not the Swiss National Bank highly approve. If we switch to how central bankers operate an inflation forecast like this is fertile ground for interest-rate cuts.
So on our journey through the financial landscape we see central banks running risks with inflation with their interest-rate cuts. Whereas today we see one with an opportunity that would have others high-fiving but choosing not to do so.
A strong currency
The Swiss Franc or Swissy is pretty much the prime example of a strong currency. It is in today’s announcement if you look.
The SNB remains willing to be active in the foreign exchange market as necessary.
They mean sell the Swiss Franc and on this week’s journey we have looked at a country struggling for foreign exchange and now one awash with it. A decade or so ago I used to describe the Swissy and the Japanese Yen as the “Currency Twins” as we looked at the consequences of the Carry Trade. Now it is rather different with my chart telling me a Swissy bought 120 Yen five years ago as opposed to 186 now.
We can continue that in a more anti-inflationary theme because it used to be that the US Dollar was worth more than a Swiss Franc. But now a Swissy buys 1.25 Dollars. So the song “I need a Dollar” should have been I need a Swissy…
A lot and maybe all of SNB policy is around the exchange rate.
Gold
A more recent factor boosting Switzerland and its currency has been the increased interest in Gold and in particular the rise in its price. But you do not need to take my word for it as here is a special report from the SNB.
Furthermore, in times of global stress, as the safe-haven motive of gold demand is amplified, Swiss gold exports redirect towards key suppliers of gold-backed financial instruments, in turn causing large shifts in trade balances with Switzerland’s trading partners. Gold-driven shifts in Swiss external sector indicators thus require careful interpretation since they reflect global factors—not changes in Swiss economic fundamentals.
Or if you prefer Shaggy as this was about dodging the tariff bullet.
But she caught me on the counter (It wasn’t me)
Saw me bangin’ on the sofa (It wasn’t me)
I even had her in the shower (It wasn’t me)
She even caught me on camera (It wasn’t me)
She saw the marks on my shoulder (It wasn’t me)
Heard the words that I told her (It wasn’t me)
Heard the screams gettin’ louder (It wasn’t me)
Actually this was in my opinion more likely to attract the attention of President Trump and thus contribute to Switzerland’s unfavourable tariff treatment.It is often like that when central bankers try to be clever.
But the rise in the Gold price to around US $3800 has been an enormous boost for the Swiss economy.
The Swiss National Bank as The Zurich Whale
This is the next stage in the Swiss situation because over time the SNB has intervened massively to try to weaken the Swiss Franc. In fact in a period just over a decade ago they promised “unlimited intervention” and gave it a go until they got swamped and folded. But for today’s purpose they still have the enormous foreign currency holding’s. Some 736 billion Swiss Francs worth at the start of 2025.
Problem number one: If the Swissy rises they are worth less…
Problem number two: If you invest in bonds and 64% of the above is in government bonds and 11% in other bonds and bond yields rise you have had a nightmare. There is a subplot in that as interest-rates have fallen even the short-dated bonds likely to be held have not gained as much as you might think.
Financial Genius time: 25% of the above is in equities and in particular US ones. An example this week of the bull market here has been the rise in Apple. If you own some 45.47 million Apple shares then a 6% rise in a week is party time. If this was the Bank of Japan I would say sake all round! What do the Swiss drink?
So as you can see the investments have been tri-polar. The maths of this via the latest set of SNB results is below.
The loss on foreign currency positions totalled CHF 22.7 billion. Interest and dividend income amounted to CHF 6.2 billion and CHF 1.6 billion respectively, while interest expenses stood at CHF 0.5 billion. Price gains of CHF 3.9 billion were recorded on interest-bearing paper and instruments, and CHF 10.0 billion in price gains were recorded on equity securities and instruments. Exchange rate-related losses totalled CHF 43.9 billion.
Comment
There is a lot of nuance to the Swiss position. But the basic theme is that after all the central banks who cut interest-rates with no or indeed negative justification we have one who has plenty of justification but chose not to! Perhaps of course they saw the ECB cut seven times in a row and applied the Lagarde Rule of Thumb ( if she is doing it then it is usually wrong…).
Upside down
Boy, you turn me
Inside out
And round and round
Upside down
Boy, you turn me
Inside out
And round and round. ( Diana Ross)
