Bern, Switzerland — The Swiss National Bank announced a significant shift in its monetary policy Thursday, lowering interest rates by 25 basis points to a historic low of 0%. This decision has sparked concern among economists regarding the potential return to negative interest rates in the country.

Market expectations had already anticipated this move, with traders pricing in an 81% likelihood of a quarter-point decrease. The bank’s reduction aims to address waning inflationary pressures, which have diminished compared to previous quarters. The SNB emphasized its intent to closely monitor economic conditions and adjust its policies to maintain inflation within stable ranges in the medium term.

In contrast to many nations grappling with inflation, Switzerland currently faces deflation. Recent reports indicated a 0.1% annual decrease in consumer prices as of May. This fluctuation is not unprecedented for the country, which has experienced several deflationary periods in the past decade. Analysts attribute this phenomenon largely to the strength of the Swiss franc, which tends to rise during global market uncertainties, driving down the cost of imported goods— a significant component of the consumer price index.

“The Swiss franc is viewed as a safe-haven currency,” said Charlotte de Montpellier, a senior economist at ING. “Whenever stress manifests in global markets, it appreciates, leading to lower prices for imports.” She noted that, as an open economy, Switzerland’s reliance on imports makes the currency’s strength particularly impactful on domestic inflation.

The franc’s continued ascent poses challenges for the SNB, which is implementing strategies to curtail its appreciation by keeping rates lower than those of other economies. Following the rate cut, the franc strengthened further, with the U.S. dollar remaining stable against it.

Looking ahead, some economists speculate the SNB may need to pursue even deeper cuts if inflation fails to rebound. Adrian Prettejohn of Capital Economics predicts that rates could drop to -0.25% within this year, with the possibility of reaching -0.75%, the rate seen during the last decade. He explained that lowering interest rates makes borrowing cheaper, stimulating investment through reduced borrowing costs.

However, there are inherent risks associated with negative rates. Prettejohn expressed concerns that such measures could adversely affect savers and banks alike, diminishing returns on savings and loans. De Montpellier echoed this sentiment, warning that prolonged negative rates could disrupt financial markets, decrease bank profit margins, and threaten long-term financial stability.

As Switzerland navigates these economic challenges, the SNB remains vigilant, signaling that further adjustments in monetary policy may occur if necessary to secure the country’s economic health.