POLL-SNB to cut rates to zero on June 19, with chance they turn negative this year

By Indradip Ghosh

BENGALURU, June 16 (Reuters) - The Swiss National Bank will cut its policy rate on June 19 to zero, according to most economists polled by Reuters who however said there now was a strong chance rates return to negative territory this year.

A double-whammy of deflationary pressure and a strong currency has swayed markets to price Swiss interest rates below zero in September. Policymakers have said they would not shy away from bringing negative rates back.

But most economists were still reluctant to put a minus sign in front of their forecasts for this cycle, owing to heightened uncertainty, primarily around the erratic U.S. tariff policy.

An overwhelming majority, 27 of 30, in a June 11-16 Reuters survey said the SNB would trim its key interest rate by 25 bps on Thursday to zero, its lowest since June 2022. Three expected a half-point cut, taking the rate to -0.25%.

At 0.25%, Swiss rates are already the lowest among major world economies, even lower than in Japan.

"We expect a 25 bp cut on Thursday and then stay at 0% for an extended period. We don't think the SNB will go into negative territory. Obviously, there's a clear risk it does but at this stage we don't think the SNB really wants to make a bold 50 basis point rate cut," said Raphael Olszyna-Marzys, economist at J. Safra Sarasin.

"Deflation pressure is coming from external factors and largely due to what the U.S. administration is doing - we cannot exclude different U-turns from them. For the SNB, it makes more sense to move in small steps and then assess the situation again in September."

U.S. President Donald Trump in April placed steep tariffs on all of its trading partners, including Switzerland, initially hit by a 31% levy for its exports, which include luxury watches and pharmaceuticals. The July 9 deadline for a 90-day pause is fast approaching, with no clarity on what will happen next.

INFLATION BELOW TARGET

Ongoing uncertainties have helped the safe haven franc CHF= to gain over 11% against the dollar this year and remain largely steady versus a strong euro, dragging inflation below the SNB's 0%-2% target to -0.1% last month.

Inflation was expected to average 0.3% this year and 0.6% next, a downgrade from 0.6% and 0.8% in a March survey.

Two-thirds of forecasters, 20 of 30, said rates would be at zero by end-2025. Nine said they would decline to -0.25%, in line with market pricing. Only one said -0.50%.

In response to an additional question, all but two of 19 economists said the risk was high of rates going negative this year, probably in September. In March, a majority said the risk was low.

The last episode of negative interest rates, between early 2015 and mid-2022, did not do much to stoke price pressures before pandemic-related supply distortions pushed them up.

"It is also likely the SNB will want to rely more on intervention in the foreign exchange market," said Charlotte de Montpellier, senior economist at ING, one of those who expects the SNB to cut to negative in September.

"However, this is not easy in the current conditions and there is always the risk of provoking the ire of the U.S. administration," she added.

The SNB this month denied being a currency manipulator but said it would intervene where necessary to keep inflation on track.

Meanwhile, the economy, which grew 0.8% last quarter, was predicted to grow 1.3% this year and 1.5% next, compared to the government's latest projections of 1.3% and 1.2%.

(Other stories from the Reuters global economic poll)