Switzerland makes second interest rate cut as major economies diverge on monetary policy easing

A view of the headquarters of the Swiss National Bank (SNB), before a press conference in Zurich, Switzerland, March 21, 2024. 

Denis Balibouse | Reuters

The Swiss National Bank on Thursday trimmed its key interest rate by 25 basis points to 1.25%, continuing cuts at a time when sentiment over monetary policy easing remains mixed among major economies.

Two thirds of economists polled by Reuters had anticipated the SNB would decide in favor of a 25-basis-point-cut to 1.25%.

The Swiss franc weakened in the wake of the announcement, with the Euro gaining 0.3% and the U.S. dollar up 0.5% against the Swiss currency at 8:55 a.m. London time.

Following the Thursday decision, the Swiss central bank pegged its conditional forecast for inflation at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026. The figures assumes a SNB interest rate of 1.25% over the prediction period.

The country’s inflation flatlined at 1.4% in May after a bump up in April and is expected to average the same level across full-year 2024, according to the SNB’s latest projections.

The Swiss bank said it now anticipates economic growth of around 1% this year and around 1.5% in 2025, anticipating slight increases in unemployment and small declines in the utilization of production capacity.

“Over the medium term, economic activity should improve gradually, supported by somewhat stronger demand from abroad,” the SNB said.

Swiss National Bank chair: We lowered rates because of lower inflationary pressure and stronger Swiss Franc

Speaking to CNBC’s Silvia Amaro, SNB Chair Thomas Jordan stressed the impact that inflationary winds had on the bank’s latest decision-making.

“[We have] inflationary pressures that slightly declined, we have also [a] strong Swiss franc, and we have an increase in uncertainty globally. So, we came to the conclusion that, given those circumstances, it is best to lower rates by 25 basis points,” he said.

While underlining that the SNB’s foremost instrument is its interest rate, Jordan said that the bank is also ready to intervene into the foreign exchange market, if necessary.

“There are big swings in the exchange rate that could have an impact, or, really, big changes in [the] economic outlook of the world economy,” he noted. “The Swiss franc appreciated to some extent, vis-à-vis our last monetary meeting. The exchange rate has an influence on monetary conditions, and we take that into account.”

Jordan confirmed he will attend his last SNB monetary policy meeting in September, before leaving his post that month.

Future steps

Switzerland already has the second-lowest interest rate of the Group of Ten democracies by a wide margin, following Japan. It became the first major economy to cut interest rates back in late March and was earlier this month followed by the European Central Bank, and questions are now mounting over whether it will proceed with a third rate cut this year.

The SNB’s inflation forecast “suggests that there is still some restrictiveness to be squeezed out this year, and for me, that is a heavy signal that another rate cut is coming in September,” said Kyle Chapman, FX markets analyst at Ballinger Group. “I expect the SNB to follow up with a third cut next quarter, and there is potential for a fourth in December if there is still high conviction in the restrictive level of monetary policy.” 

He signaled that this outlook leaves the Swiss franc in a “vulnerable position.”

A Capital Economics analysis note out Thursday disagreed with the view, saying that the SNB is unlikely to proceed with further cuts this year in the current inflationary landscape.

“Looking ahead, we think that the SNB will not cut rates again this year as we are now no longer confident that underlying inflationary pressures are abating because labour compensation is growing at a strong rate and services inflation remains very sticky,” the note said.

Adrien Pichoud, chief economist at Bank Syz, also said that the SNB is “now done with the recalibration of its monetary policy and that it shouldn’t cut rates further this year.”

The U.S. Federal Reserve has yet to blink on interest rate reductions, and market participants will be following later in the Thursday session to see if the Bank of England takes the leap to trim, after U.K. inflation eased to the 2% target for the first time in nearly three years.