Swiss Franc: SNB Hold View Reinforces Funding Currency Role, Says ING

The Swiss franc’s status as a preferred funding currency is being reinforced by the Swiss National Bank’s (SNB) current on-hold monetary policy stance, according to a new analysis from ING. As of early 2025, the SNB has maintained its policy rate at 1.75%, signaling a cautious approach amid global economic uncertainty and subdued inflation pressures in Switzerland.

Why the SNB’s Hold Matters for the Franc

The SNB’s decision to pause its tightening cycle, after raising rates from negative territory through 2023, has made the franc an attractive vehicle for carry trades. Investors borrow in low-yielding currencies like the franc to invest in higher-yielding assets elsewhere. ING analysts note that the SNB’s commitment to holding rates steady, rather than cutting them, provides a degree of stability that encourages this funding activity.

Switzerland’s inflation rate, which stood at 1.4% in January 2025, remains well below the SNB’s 2% target ceiling, giving the central bank room to keep rates unchanged. This contrasts with other major central banks that are either cutting rates or signaling future cuts, further differentiating the franc’s position.

Implications for Forex Markets

For currency traders, the SNB’s hold view means the franc is likely to remain under pressure against higher-yielding currencies, as the funding trade continues. ING’s analysis suggests that the franc may weaken modestly against the euro and the dollar in the near term, as long as the SNB maintains its current stance.

However, the SNB retains the option to intervene in foreign exchange markets if the franc appreciates too sharply, which could disrupt the funding trade. The central bank has a long history of intervening to weaken the franc when it threatens Swiss export competitiveness.

What This Means for Investors

For investors and businesses with exposure to Swiss franc-denominated assets, the key takeaway is that the franc’s role as a funding currency is likely to persist as long as the SNB stays on hold. This has implications for hedging strategies, borrowing costs, and cross-border investment flows. The franc’s low yield makes it a cheap source of funding, but also exposes borrowers to potential appreciation risk if the SNB changes course.

Conclusion

The SNB’s on-hold policy stance, driven by contained inflation and a cautious outlook, continues to support the Swiss franc’s traditional role as a funding currency in global markets. ING’s analysis underscores that this dynamic is likely to persist unless the SNB shifts its policy direction, making the franc a key currency to watch for forex traders and international investors.

FAQs

Q1: What is a funding currency?
A funding currency is a currency with a low interest rate, borrowed by investors to invest in higher-yielding currencies or assets. The Swiss franc has historically been a popular funding currency due to the SNB’s low interest rate policy.

Q2: How does the SNB’s hold stance affect the Swiss franc?
The SNB’s decision to keep rates steady, rather than cutting them, provides stability that encourages the use of the franc in carry trades. This typically puts downward pressure on the franc’s value against higher-yielding currencies.

Q3: Could the SNB change its policy soon?
While the SNB is currently on hold, it could adjust rates if inflation or economic conditions change significantly. The central bank also retains the ability to intervene in forex markets to manage the franc’s value.