The Swiss central bank’s expected move to cut interest rates to zero may threaten bank profit margins and steer the financial system into unfamiliar territory.
As the Swiss National Bank’s upcoming policy meeting approaches, economists are increasingly anticipating a drop in interest rates to the zero mark. While seemingly cautious, this decision could place the Swiss banking system under significant strain.
With mounting expectations that the Swiss National Bank (SNB) will reduce its key interest rate by a quarter of a percentage point this week, Switzerland appears poised to enter a new chapter in monetary policy. Such a move would not only end a brief era of positive interest rates but also lead the country into uncharted waters by adopting a zero interest rate—something the SNB has never implemented before.
Unfamiliar Ground for Banks
Until now, the SNB has either maintained rates in negative territory or shifted directly to positive levels, bypassing the zero threshold altogether. At one point, the policy rate reached a world-record low of -0.75%. However, settling precisely at zero is a different kind of challenge—an ambiguous middle ground that analysts describe as a financial “no-man’s land.”
At zero, banks no longer earn interest on client deposits, yet lack a strong rationale for imposing fees unless the rate turns negative again. This combination squeezes net interest margins, particularly for institutions like UBS, PostFinance, and Zuercher Kantonalbank, which rely heavily on deposit and mortgage income.
Why the Central Bank May Move Now
Swiss policymakers are motivated by persistently low inflation, which has been dampened by the strength of the Swiss franc. In April, the franc reached a ten-year high against the U.S. dollar as global instability and trade tensions—spurred by U.S. President Donald Trump’s tariff measures—prompted investors to seek safe-haven assets.
By lowering rates, the SNB aims to weaken the currency and stimulate domestic price growth. However, such action also comes with side effects—mainly for commercial banks, which bear the brunt of thinner interest margins and reduced income from core operations.
Banking Sector Uneasy with the Zero Scenario
Banking experts warn that a prolonged period of zero interest rates could significantly undermine profitability. According to Ausano Cajrati Crivelli, an analyst at ZKB:
“A steady zero interest rate is the worst-case scenario for Swiss banks. It doesn’t drastically shift conditions in the short term, but over time it becomes a real challenge.”
As 2025 unfolds, Swiss banks are already bracing for a leaner financial year amid the prospect of falling rates. Many institutions have also been preparing for the possibility of a return to negative rates—a scenario that remains on the radar.
Negative Rates Still on the Table
Despite the current focus on zero, SNB President Martin Schlegel recently stated that negative interest rates remain an option, even if “nobody likes it.” This remark underscores the central bank’s readiness to re-embrace unconventional tools if necessary to maintain price stability.
Conclusion:
The SNB’s potential rate cut to zero—though intended to address currency strength and subdued inflation—could have lasting repercussions for the Swiss banking landscape. With a rate neither low enough to warrant penalties nor high enough to reward savers, financial institutions may find themselves trapped in a profit squeeze. If prolonged, this unique environment could force banks to revisit their business models and operational strategies.
