Tension was high ahead of the monetary policy decision on Thursday morning. Would the Swiss National Bank (SNB) lower its key interest rate by 0.25 percentage points, as expected by most economists and analysts, and thus set it at zero? Or would the Governing Board under the leadership of Chairman Martin Schlegel catapult Switzerland back into the realm of negative interest rates with a big move of 0.50 percentage points?

A third scenario was proposed Tuesday by independent economist – and former SNB employee – Adriel Jost. He suggested the SNB could hold its key interest rate steady at 0.25 percent, mirroring the U.S. Federal Reserve's decision a day later to maintain its own benchmark rate at a significantly higher range of 4.25 to 4.50 percent.

«Experimental Extreme Measure»

Jost estimated the probability of the SNB doing nothing at all on Thursday to be, «higher than many observers assume». He argued that while the current economic environment remains solid, the SNB – having never previously set its key interest rate at zero – should avoid what he describes as an «experimental and extreme measure».

Extreme because an interest rate of -0.25 percent would then have to be introduced for banks' sight deposits at the SNB that exceed the limit, which would already be a negative interest rate. The downgrading of the interest rate helps to ensure that the money market continues to function well and thus provides a reliable basis for determining the saron. This is also relevant in terms of monetary policy, as the SNB wants to keep the saron as the most important secured short-term money market rate as close as possible to the key interest rate.

Negative Interest Rate as a Last Resort

On Thursday, the SNB promptly opted for precisely this option, which is preferred by the majority of bank economists, and set the key interest rate at zero. The new inflation forecast is only slightly lower than the old one from March 2025 and, as expected, the economic outlook mentions trade tensions as a worrying factor.

President Schlegel had an unmistakable message ready with regard to a possible return to a negative key interest rate. The SNB is aware «that the negative interest rate can have undesirable side effects and represents a challenge for many players in the economy,» he stated when presenting the interest rate decision to the media. These unintended side effects include, for example, the negative impact on bank profits.

For Once, Almost the Same Wording as UBS

Addressing bank profitability, SNB Vice President Antoine Martin used the presentation of the latest Financial Stability Report to reaffirm alignment with the Federal Council's stance on future banking regulation. However, he made a remarkable statement that was strikingly reminiscent of the arguments put forward by UBS representatives: «Profits are the first line of defense for absorbing losses in the event of a stress event» – which leads to the conclusion that only profitable banks are stable banks.

In a February 2025 interview with finews.ch, UBS veteran Markus Ronner made his view clear: «Shareholders are the first line of defense in a crisis.» As Group Chief Compliance and Governance Officer, he warned that stricter capital requirements could significantly undermine the bank's attractiveness – potentially impacting overall financial stability».

«High Hurdle»

But back to monetary policy, Schlegel emphasized in response to a question: «The threshold for introduction a negative interest rate is significantly higher than for cutting rates while still in positive territory».

This suggests that the SNB would only turn to negative interest rates as a last resort – specifically, in response to a major shock that disrupts its baseline outlook slowing, but still positive, global economic growth over the coming quarters.

No Permanent Feel-Good Policy for Everyone

This clarity on the negative interest rate instrument, which is problematic for the banking and monetary system, is welcome. Schlegel is signaling that the SNB's influence has limits – and that is cannot indefinitely sustain a feel-good mix of low (but not negative) inflation, a subdued franc supporting exporters, and ultra-cheap money for borrowers. It also dampens expectations that the SNB can fully absorb turbulence at all times.

A second key point: as anticipated, the SNB emphasized the presence of«uncertainties». However, the term appeared less frequently than in prior statements. It also described them as «still high» rather than «higher», despite current developments that might warrant stronger language. Notably, the Governing Board omitted references to geopolitical tensions – typically a driver of safe-haven flows into the franc – and focused instead on trade policy, its baseline scenario, and the implications for growth and inflation.

Act of Self-Restraint

This deliberate restraint is also noteworthy. Historically, most armed conflicts – while devastating locally – have had limited lasting impact on the global economy or financial markets. Moreover, geopolitics lies outside central banks' core competencies; monetary authorities have little comparative advantage in assessing such risks.

However, a somewhat gloomy interpretation of this omission of geopolitics and armed conflicts is also conceivable. In the past, these were probably also used to motivate the SNB's assessment of the high level of uncertainty - in a climate of heightened uncertainty, central banks face less pressure to commit to a fixed course – precisely because so many outcomes remain plausible.

Calming Pills Instead of Warnings?

Explicit mention is no longer needed – market participants broadly recognize that uncertainties remain substantial, whether stemming from trade tensions or geopolitical risks (a distinction that is increasingly blurred). Is the situation now so serious that the SNB is no longer issuing the usual warnings and drawing attention to potential risks, but rather giving the economy and the markets reassurance pills?

The fact that the answer to this question is not clearly negative is almost a little concerning.