SNB holds key rate at zero, says uncertainty remains high

The Swiss National Bank maintained its benchmark interest rate at 0% due to ongoing uncertainty in the Middle East, despite a recent uptick in inflation.

The Swiss National Bank left its benchmark interest ‌rate ​unchanged on Thursday, saying its medium-term price outlook had barely changed despite a recent uptick in inflation stoked by higher fuel costs arising from the Iran war. The central bank also said that the situation in the Middle East remained highly uncertain despite the recent interim peace deal between Iran and the United States as it ‌kept its policy rate at 0%, the lowest among the world's major economies.

"The situation is still very uncertain," SNB Chairman Martin Schlegel told reporters. It could not be ruled out that the easing of tensions was only temporary, Schlegel said, noting that the central bank had evaluated the latest political developments before finalising its monetary policy decision. Financial markets and all analysts polled by Reuters had expected the central bank to keep its rates on hold. The Swiss franc fell slightly ‌after the decision, with the dollar last up 0.35% at 80.25 francs.

ECB HAS ALREADY RAISED RATES In contrast to the SNB, the European Central Bank already raised rates last week to counter a build-up in price ‌pressures, the first major central bank to do so. The U.S. Federal Reserve left interest rates unchanged on Wednesday, but its policymakers expect a hike in the course of this year. Norway's central bank also kept its policy interest rate on hold on Thursday, though it flagged that borrowing costs will likely be raised later this year. The Bank of England is expected to keep rates unchanged later in the day. Swiss inflation remained at 0.6% in May, its highest since November 2024, driven by a spike in fuel prices, but core inflation remained low ⁠at 0.3%, with ​both readings well within the SNB's 0%-2% target range, which ⁠it defines as price stability.

The low weighting of petrol in the consumer goods basket has helped Switzerland avoid price increases similar to the 3.2% rate seen in the euro zone in May. The safe-haven Swiss franc, which surged at the outbreak of hostilities in the Middle ⁠East to its highest level in more than a decade against the euro, has also helped keep inflation in check by making imports cheaper. MODIFIED LANGUAGE ON INTERVENTIONS Earlier this year, the SNB expressed increased readiness to intervene in the foreign exchange markets to ​counter the franc's "rapid and excessive appreciation." On Thursday, it slightly modified its language, saying it had an increased willingness to intervene in the foreign exchange market "if necessary."

Chairman Schlegel said it was "difficult to say" ⁠whether this meant the SNB had a greater or lesser inclination to act in the currency markets, but risks of upward pressure on the franc remained. ING senior economist Charlotte de Montpellier interpreted the language as a sign the SNB would be more selective in using interventions.

"I think it's a ⁠tool ​they want to use during periods of market stress (such as in early March), but no longer on a permanent basis, as the SNB used to do in the past. I doubt they're intervening at the moment." Extending the zero policy rate was a logical step given the continued benign inflation picture and some slack in the Swiss economy, economists said.

"While the Swiss economy may look solid, capacity utilisation, inflation and consumer confidence are still low, while ⁠unemployment is rising," said UBS economist Alessandro Bee, noting geopolitical uncertainties remained elevated. De Montpellier described the situation for the SNB as very comfortable, with inflation under control and other central banks' more hawkish turn easing the ⁠upward pressure on the franc.

While noting that the situation in the ⁠Middle East could worsen again and curb economic activity, the SNB also highlighted U.S. trade policy as a continued source of uncertainty. The central bank raised its Swiss inflation forecast for 2026 to 0.6% from 0.5% previously and by a tenth of a percentage point for each of the next two years. But it still predicted average inflation ‌to be clearly below 1%, well ‌within its target range.