(Bloomberg) — The Swiss National Bank’s next cut in borrowing costs may be about to cause a headache for banks, if officials end up experimenting with their first-ever interest rate of zero. 

A quarter-point reduction anticipated by most economists on Thursday would not only draw a line on less than three years of positive monetary policy, but would also place the financial system in unchartered territory by stopping short of going negative, conceivably for some time to come.

Swiss policymakers are poised to act in order to stoke consumer prices depressed by the strength of their currency. It touched a decade-high against the dollar in April as global market ructions prompted by US President Donald Trump’s tariff onslaught drove haven flows into the franc.

Despite having previously pushed the rate down to -0.75% during the past decade, the lowest level in the world, the SNB never actually made a stop at zero before — neither on the way down, nor when it finally exited negative territory in 2022. While policy regimes all differ, global peers have tended to skirt that threshold too.

Officials have long acknowledged the discomfort of going below zero for Switzerland’s $4.1 trillion banking sector, whose traditional domestic savings and mortgage business generates less income under that level. But at least institutions including UBS Group AG, Postfinance and Zuercher Kantonalbank have the option of charging customers who keep money with them.

Zero risks turning out to be an even more awkward no-man’s land. It erases the interest that allows them to attract deposits and compresses margins on loans, but also offers a poor justification to impose costs on clients. And with most economists anticipating no further cuts for now, the squeeze could be enduring. 

“A steady zero interest rate is the worst-case scenario for Swiss banks,” said Ausano Cajrati Crivelli, an analyst at ZKB. “For a few months, that doesn’t drastically change the game, but if it persists for an extended period of time, it could become more challenging.”

Swiss banks were already facing a leaner year with the prospect of rates falling. They have also been primed for the risk of returning to negative territory. SNB President Martin Schlegel repeated as recently as this month that it’s an option, even if “no one” likes it.

What Bloomberg Economics Says:

“Risks are tilted to the downside given how much the franc has strengthened. So a policy surprise, say a 50 basis-point cut, remains a possibility.”

—Jean Dalbard. For his SNB preview, click here 

The prospect that borrowing costs could land at the precipice of negative would be another twist in Switzerland’s fickle relationship with its banks. UBS is currently reeling from the government’s proposal earlier this month for as much as $26 billion in additional capital requirements.

Concerns over the impact of a zero rate may have contributed to decisions to skip that level when policymakers introduced negative rates in 2014, as well as when it abolished them again almost eight later. 

This time however, SNB officials appear to have signaled policy adjustments in measured increments, stressing that even after a negative inflation rate of -0,1% last month, they want to avoid over-reacting.

Officials are also emphasizing the use of borrowing costs as a lever. Market intervention to contain the franc’s strength is frowned upon by the Trump administration, which just put Switzerland on a watch list as a possible manipulator.

The central bank’s judgments reflect tough trade-offs faced by officials, who must act for the greater good by balancing the interests of one part of the economy against another.

“The SNB has been very consistent in its framing of price stability before everything else,” said Claude Maurer, chief economist at BAK Basel Economics. “No favors for specific industries. If they conclude that zero is the right number, they will set zero.”

He is one of the large majority of economists anticipating a 25 basis-point reduction — to zero — when officials meet on June 19. Only a few in a survey by Bloomberg see a bigger move into negative territory.

Markets also put the probability of a larger cut at less than 30%, though strategists at Morgan Stanley have warned that traders are underpricing such a risk.

If the forecasts prove right and the rate does end up at zero, the concern for banks then becomes that it stays stuck there. That’s the median prediction of economists for this year and next. 

For all the pain that might cause, available data also suggest banks should still be able to cushion the fallout over time.

In less than three years of positive Swiss rates, they already earned more in interest from the SNB than all money they paid to the central bank during more than seven years of negative rates, according to its annual reports.

According to separate central-bank data that is the most recent available, 2023 was also the most successful year for Swiss banks in terms of revenue, totaling more than 108 billion francs ($123 billion). That’s up 9% compared with 2015, even though interest income dropped slightly during the phase of negative monetary policy.

“If banks can’t earn interest on their deposits, they will typically try to make up for this in the loan or mortgage business, or through fees,” said Martin Hess, chief economist of Swiss Banking, the industry’s main national lobby. “I expect that the mortgage business will be used most for offsetting, as mortgages make up the largest part of Swiss banks’ balance sheets.”

Most Swiss banks endured the period of negative rates relatively unscathed. That was partly because many of them, especially wealth managers, have a high proportion of fee income and don’t rely on net-interest margins as much as peers in the euro area.

Some banks still hold out the hope that officials will repeat their previous policy and avoid just a quarter-point move this month, according to Andreas Venditti, an analyst at Vontobel. 

“A negative rate is better than zero, because then you can start charging clients,” he said. 

But Schlegel himself hinted last month that he won’t easily be swayed by banks’ profit motives. When questioned on dimmer revenue prospects in Basel on May 27, the SNB chief didn’t flinch.

“Swiss banks have also during negative rates found ways to generate revenue,” he said.

–With assistance from Noele Illien, Nicholas Comfort, Harumi Ichikura and Jan-Henrik Förster.

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