Zero Interest Rates Are Back in Europe

June 19, 2025

Key Takeaways

  • Swiss Rate Cut: SNB slashes rates to 0% to counter deflation and a surging franc .

  • ECB Easing: Eighth consecutive cut brings deposit rate to 2%, citing cooling inflation and trade risks .

  • Deflation Threat: Switzerland’s May inflation at -0.1%, driven by tourism/oil price drops and franc strength .

  • Policy Risks: SNB hints negative rates possible but politically fraught; ECB avoids forward guidance .

  • Trade Turbulence: U.S. tariffs and EU defense spending reshape growth forecasts .

Zurich: The Zero Hour

The Swiss National Bank cut its policy rate to zero. A 25-basis-point slice. Expected? Mostly. Still, the room felt heavy. Chairman Martin Schlegel called it a response to "lower inflationary pressure." May’s inflation print: -0.1%. Deflation. The franc’s strength—a safe-haven magnet in global chaos—crushed import prices. Zurich’s bankers watched the franc spike post-announcement. Schlegel shrugged. "Current negative inflation is not a reason to lower rates." Medium-term stability mattered. Not one month’s dip.

Frankfurt’s Eighth Cut

Across the border, the European Central Bank trimmed rates again. Deposit facility down to 2%. Eighth cut since June 2024. Christine Lagarde called it "data-dependent." Eurozone inflation: 1.9% in May. Below target. Energy prices sank. The euro flexed. One dissenting voice on the Governing Council. Lagarde didn’t name names. New projections: 2025 inflation at 2.0%, down from 2.3%. Growth? Flat at 0.9%. Trade tensions loomed. "Uncertainty" peppered the statement like black pepper.

Deflation Mechanics

Switzerland’s deflation isn’t new. The 2010s saw it. Now, tourism and oil sectors drag prices lower. The SNB’s forecast: 0.2% average inflation in 2025. Barely breathing. ING’s Charlotte de Montpellier explained: "Switzerland is a small, open economy. Imports dominate the CPI." A strong franc makes TVs, petrol, pasta cheaper. Good for consumers. Bad for exporters. Worse for the SNB’s inflation target. They revised forecasts down three years straight.

Currency Wars and Tariffs

The franc gained 11% against the dollar in 2025. Safe-haven flows. The SNB muttered about intervention. Washington noticed. Switzerland now sits on the U.S. currency manipulator watchlist. Meanwhile, U.S. tariffs reshaped trade. Eurozone exporters front-loaded shipments—stockpiling steel, autos, anything tariff-bound before hikes hit. First-quarter growth got a sugar rush. 0.3%. Lagarde called it "momentum." Analysts called it temporary.

Negative Rates: The Unwanted Tool

Schlegel didn’t rule out sub-zero rates. "As a central bank, you can never exclude measures." But his voice tightened. "The hurdle is higher now." Negative rates hurt savers. Pension funds bleed. Banks choke on compressed margins. From 2014 to 2022, Switzerland lived with them. Hated them. Now, markets price a 53% chance of negative SNB rates by September. Schlegel’s warning: side effects could bite. Hard.

Real Estate’s Time Bomb

Swiss real estate prices climbed for years. Cheap mortgages fueled it. Now rates sit at zero. The SNB’s statement skipped real estate risks. Schlegel dodged. Analysts didn’t. "Negative rates would overheat housing," said J. Safra Sarasin’s Karsten Junius. Cheap money inflates bubbles. The SNB knows. 2022’s property frenzy still haunts Zurich’s banking district.

Trade Winds and Defense Spending

Germany amended its "debt brake." Defense spending won’t count against borrowing limits. A €500 billion infrastructure fund followed. Europe pivots to rearmament. ECB projections credit government investment for "supporting growth." Offsetting trade chaos. Tariffs? "Downside risk," the ECB said. In scenarios, escalated trade wars could slash growth below 0.9%. Benign outcomes? Unlikely.

The Waiting Game

The SNB’s next move? September. Schlegel offered no path. "We cannot forecast." The ECB meets July 24. Traders see a 45% chance of another cut. Lagarde stressed "meeting-by-meeting" checks. Eurozone bond yields inched lower. Swiss two-year yields stayed negative. Markets bet on more cuts. Always.

Frequently Asked Questions

Why did the SNB cut rates to zero?

Deflation (-0.1% in May) and a soaring franc pressured the SNB. Cutting to zero aims to weaken the franc and boost prices .

Will the ECB cut rates again in 2025?

Markets price one more cut in 2025 (to 1.75%), but the ECB avoids forward guidance. July’s decision hinges on trade war impacts and inflation data .

How do negative rates affect Switzerland?

Savers earn nothing. Pension funds struggle. Banks face margin pressure. Real estate may overheat. The SNB used them from 2014-2022 but calls them a last resort .

Did U.S. tariffs influence ECB/SNB decisions?

Yes. Tariffs spurred front-loaded eurozone exports, briefly lifting Q1 growth. Switzerland’s SNB cited tariffs as a "main risk" to global growth .

What’s next for the Swiss franc?

Likely more strength. Safe-haven demand persists. The SNB may intervene in forex markets if the franc’s rise accelerates deflation .