Swiss Franc Faces Hit if it Becomes Lowest Yielding G-10 Currency — Market Talk

By Ed Frankl and Joshua Kirby

Switzerland's central bank cut its key interest rate for a fourth straight meeting Thursday, seeking to rein in its strengthening currency and protect its exporters amid high levels of uncertainty about the future of global trade.

The Swiss National Bank cut the rate to 0.5% from 1%, matching the half-point move announced by Canada's central bank Wednesday. Most investors expect the European Central Bank to announce a quarter-point cut later Thursday.

The SNB signaled in its previous meeting that further reductions to the key rate were likely, having cut rates by 25 basis points in the three quarterly meetings since March.

The Swiss franc weakened versus the euro shortly after the rate decision, having appreciated over the last six months as the ECB's rate cuts gathered pace.

The bank also trimmed its inflation and growth expectations for 2025. Switzerland's inflation rate has come in below the SNB's forecasts in recent months to reach its lowest level since June 2021 in October. However, it has remained within the SNB's target of 0%-2%.

But the appreciation of the franc, which makes Swiss exports more expensive and imports cheaper, could be of greater concern ahead for the SNB and its new chairman Martin Schlegel.

"The forecast for Switzerland, as for the global economy, is subject to significant uncertainty. Developments abroad represent the main risk," the SNB said in its statement accompanying the rate decision.

"In particular, the future course of economic policy in the U.S. is still uncertain," it added.

The franc is seen as a safe haven by investors at a time when there is great uncertainty about the future of the international trading system during the U.S. presidency of Donald Trump, and tensions in the Middle East.

Lowering interest rates is one way of reducing that appeal, but the SNB might not have much more room to maneuver, although Schlegel also said in November that negative interest rates weren't excluded from the SNB's toolbox.

That was a policy the central bank adopted between 2014 and 2022, when the bank tried to cool investor demand for the currency. Markets expect rates to reach near zero next year.

In addition to lowering borrowing costs well below levels seen in most other rich countries, the central bank has the option of buying the euro and other foreign currencies to keep a lid on the franc, as it has done in the past. The SNB spent more than 21 billion francs on purchasing foreign currencies in 2021.

The bank on Thursday reiterated its willingness to "be active" in foreign exchange markets.

But interventions in the currency market might come at a cost, and attract the attention of a new U.S. administration that is highly sensitive to perceived signs of unfairness in its trade with other countries.

The first Trump administration named Switzerland a currency manipulator in late 2020, threatening punitive actions. It was taken off the list only in 2023.

The country depends heavily on exports including pharmaceuticals, watches and machinery, with many goods going to the U.S. Higher tariffs could knock the country's economic recovery, UBS economist Alessandro Bee said in an interview ahead of the rate decision.

"Our forecasts currently are for the Swiss economy to go back to trend growth next year on the back of a recovery in manufacturing," Bee said. "If that recovery does not materialize because of a more challenging international environment, this would also lead to slower growth for the entire Swiss economy."

Among the Swiss goods that could be at risk from higher barriers are the country's iconic watches. Shares in Zurich-listed watchmakers Richemont and Swatch Group surged following the SNB's decision.

Americans are the most enthusiastic buyers of Swiss timepieces--which include Rolex, Omega, Tissot and Tag Heuer--spending more than four and a half billion U.S. dollars on them last year.

"By definition, any increase of customs duties or taxes has a negative impact on consumption, and therefore on the entire value chain," the Federation of the Swiss Watch Industry said.

Still, "Switzerland is conveniently not in the line of fire of the import tariffs potential risk," said Luca Solca, a luxury-goods analyst at brokerage Bernstein.

Switzerland's relatively low surplus in its goods trade with the U.S. should help mollify the new government, Solca said. That surplus was $22 billion last year, compared with a U.S. deficit of $279 billion with China or $70 billion with Germany.

The impact will depend ultimately on implementation, but if steeper import duties were implemented, that would drive up the price of Swiss exports goods in the U.S., UBS's Bee said. A hit to neighboring eurozone countries from the same policy would act as a drag on Switzerland too, he added.

Write to Ed Frankl at edward.frankl@wsj.com and Joshua Kirby at joshua.kirby@wsj.com