Falling inflation provides central banks with room to maneuver, enabling rate cuts. However, the often-cited «great uncertainties» play no role in forecasts. This is because these uncertainties cannot be credibly modeled or quantified. Among these unknowns is Donald Trump and his future trade and tariff policies. 

December’s Large Rate Cut

The Swiss National Bank's (SNB) significant rate cut in December was primarily driven by downgraded inflation expectations and a deteriorating economic outlook, both domestically and within the EU.

Uncertain Path Ahead

An analyst at Zürcher Kantonalbank (ZKB) expects further rate cuts, predicting that «the SNB will lower its key rate to zero by June.» 

Inflation is not the only consideration. «The SNB must account for its fewer policy meetings compared to the European Central Bank (ECB), which necessitates larger rate adjustments to maintain a competitive interest rate differential with the Eurozone,» the analyst adds.

UBS analysts note that falling expectations for interest rates in recent months have contributed to the Swiss franc’s appreciation against the euro, putting pressure on the SNB. The substantial rate cut is seen as a «preemptive measure» to stabilize expectations. UBS economists anticipate only one more 25-basis-point cut in March but acknowledge the possibility of negative rates cannot be ruled out. 

Inflation Forecast Revised Downward

In contrast to September, the SNB’s board provided no explicit guidance on further rate cuts. However, the latest inflation forecasts suggest a rise of just 0.3 percent in 2025, down from the previous 0.6 percent. The projection for 2026 was slightly revised upward, to 0.8 percent from 0.7 percent.

This signals green light for further action from a price stability perspective. However, the franc’s exchange rate situation is more complex. The widening interest rate gap with the Eurozone, currently at 2.5 percentage points, has temporarily stabilized the euro above 0.93 francs.

With the key rate at 0.50 percent, the SNB has limited room to match the further rate cuts expected from the ECB. The ECB, with its deposit rate still at 3.00 percent, has more flexibility.

ECB Cuts and Economic Projections

The ECB has also lowered its inflation and GDP forecasts. Inflation in the Eurozone is now expected to decline slightly faster, with projections of 2.4 percent for this year and 2.1 percent for 2025. GDP growth forecasts have been revised to 0.7 percent for the current year and 1.1 percent for 2025.

Not Part of the Baseline Scenario

ECB President Christine Lagarde stated at a press conference that the baseline scenario does not account for potential shifts in U.S. trade policy under Trump, who begins his second presidential term on January 20. «This is not part of our baseline,» she added. 

Similarly, the SNB does not factor these uncertainties into its forecasts, as the outcomes remain unclear. These issues are filed under the category of «great uncertainties».

Political and Economic Risks in Europe

Lagarde and SNB Chairman Martin Schlegel must also consider other key countries. Germany’s upcoming elections on February 23, 2025, and France’s fragile government without a parliamentary majority raise significant questions about fiscal policies in these two major EU economies.

«We hope for greater clarity in the coming months,» Lagarde remarked, avoiding direct references to Germany and France. «If there is one thing we have discussed in recent days, it is the sheer level of uncertainty we face – whether stemming from political situations in member states or outcomes of US policies.»

Future Rate Moves 

The timing of the ECB's next rate cut remains uncertain, with decisions expected to remain 'data-driven.' The SNB may need to respond quickly or counter further franc appreciation through currency market interventions. Otherwise, it risks moving too quickly toward zero or even negative rates. 

 Currency market interventions also pose risks in light of a second Trump administration. During his first term, Switzerland faced criticism as a currency manipulator from the US, complicating its monetary policy strategy.