Swiss National Bank Cuts Interest Rates

By John Revill

BERN (Reuters) – The Swiss National Bank (SNB) implemented a significant cut to its interest rate by 50 basis points on Thursday, marking the largest reduction in nearly a decade. This decision was driven by weaker-than-expected inflation in Switzerland and increasing uncertainties surrounding the global economy.

The central bank highlighted sluggish price increases, burgeoning risks related to future U.S. economic policy, and political issues in Europe as key factors in its decision to lower the policy rate from 1.0% to 0.5%, the lowest level since November 2022.

Despite market expectations for a rate cut, over 85% of economists surveyed by Reuters had anticipated a smaller reduction of 25 basis points.

In the aftermath of the decision, the Swiss franc depreciated, with the euro rising nearly 0.7% to 0.9339 francs and the dollar increasing 0.4% to 0.8883 francs. The Zurich stock index saw a rally, climbing 0.45% on the day.

This reduction represents the most substantial drop in Swiss borrowing costs since the SNB's emergency rate cut in January 2015 when it unexpectedly abandoned its minimum exchange rate with the euro. Martin Schlegel, the new chairman of the SNB, remarked, "With our easing of monetary policy today we are countering the lower inflationary pressure." He emphasized that the bank would keep a close watch on economic conditions and adjust monetary policy if necessary, ensuring inflation stays within the 0-2% range deemed as price stability over the medium term.

Schlegel also indicated the possibility of more interest rate cuts in the future, albeit noting that the likelihood of rates dropping below 0% had diminished following this latest reduction. He stated, "At the current juncture we cannot exclude negative interest rates in the future. Now with these cuts today the likelihood of negative rates has become smaller."

This decision was the first taken under Schlegel's leadership, showing a shift from the policies of his predecessor, Thomas Jordan, who had overseen three 25 basis point reductions earlier this year. The SNB's decision was enabled by low Swiss inflation, recorded at 0.7% in November, which has remained within its targeted 0-2% range since May 2023.

Amidst ongoing uncertainty regarding future price trends, the SNB anticipates Swiss inflation in 2025 will be lower than previously estimated at 0.3%. Schlegel mentioned that developments by other central banks would be considered but maintained that the SNB's principal focus remained domestic factors.

Other central banks, like the European Central Bank and the U.S. Federal Reserve, are also expected to announce rate cuts soon, with the Bank of Canada having already implemented a 50 basis point decrease on Wednesday. The narrowing interest rate differentials with other countries may enhance the appeal of the Swiss franc, posing challenges for exporters who are grappling with subdued demand in Europe and China.

Industry associations such as Swissmem and SwissMechanic welcomed this rate cut, with Jean-Philippe Kohl, Deputy Director and Head of Economic Policy at Swissmem stating, "This is a good decision. The lower key interest rate will dampen the upward pressure on the Swiss franc."

UBS economist Alessandro Bee noted that low inflation and risks to the European economy played significant roles in driving the rate cut. By lowering rates by 50 basis points, the SNB aims to widen the interest rate differential and preemptively address any excessive strength of the Swiss franc.

Schlegel affirmed the SNB's readiness to intervene in foreign exchange markets if necessary, while insisting that interest rates remain the primary tool. Commenting on the implications of the latest cuts, Raiffeisen's head of macro and fixed income research, Alexander Koch, indicated that the SNB's softening of forward guidance for potential further cuts could cement market expectations for lower rates. He warned that failure to deliver on these expectations might trigger renewed strength in the franc.