The SNB Could Hold Rates Steady as Inflation Undershoots Again

Swiss inflation surprised to the downside again in November, keeping consumer prices flat year-on-year after October’s 0.1 percent increase. The reading pushed Swiss government bond yields slightly lower in early trade as markets reassessed the probability of a policy shift at the Swiss National Bank’s meeting on December 11. The franc held firm near its recent highs after gaining about 13 percent year-to-date.

Cooling inflation matters because it challenges the SNB’s stated preference to avoid negative rates while simultaneously highlighting the fragility of domestic demand. Switzerland’s price trend has now undershot economists’ expectations for two consecutive months. The drop in food and non-durable goods prices shows that weakness is broadening across the goods sector, although services inflation remains supported by rising housing and energy costs.

The policy backdrop is complicated by geopolitics. The economy contracted in the third quarter as U.S. tariffs climbed to 39 percent on many exports and threatened to go as high as 100 percent for pharmaceuticals.

The November agreement to bring tariffs down to 15 percent eased recession risk, but the underlying softness in inflation raises questions about Switzerland’s ability to generate sustained price momentum.

Market attention is now centered on how the SNB interprets this combination of weak goods inflation, a strong franc, and reduced tariff pressure. The franc’s appreciation normally argues for rate cuts because it tightens financial conditions, but policymakers have recently downplayed the exchange rate’s influence on their reaction function.

Swiss government bond yields have edged lower as traders position for a prolonged period near zero rates. Equity sentiment has been mixed. Exporters remain sensitive to currency strength, while domestically oriented sectors are reacting more to the disinflation path and the prospect of slower nominal growth.

Investors will now watch the December 11 SNB meeting for any shift in forward guidance. The base case is that the central bank holds rates at zero while acknowledging the downside surprises in inflation.

The risk scenario is a more direct hint that rates could dip below zero again if December and January data confirm a sustained slide toward deflation. Any renewed volatility in the franc or fresh signals from the U.S. on tariff policy could also alter the SNB’s calculus.

The key takeaway for investors is that Swiss assets are entering a phase where currency strength, tariff uncertainty, and soft inflation interact more directly with policy expectations. Bond markets appear most sensitive to the disinflation theme. Equity investors should monitor the franc closely because even modest appreciation can compress earnings for exporters in the near term.