By Bastian Benrath
The Swiss National Bank unexpectedly cut its key interest rate by 25 basis points, moving months ahead of global peers as policymakers try to prevent gains in the franc.
Officials in Zurich lowered their benchmark to 1.5%, the first such reduction for one of the world’s 10 most-traded currencies since the pandemic abated. While some investors were betting on such a cut, most economists predicted the rate would stay unchanged at least until June.
The franc tumbled after the decision, falling 1% against the euro to its weakest level since July 2023. It dropped 1.2% against the dollar to a fresh four-month low.
“The easing of our monetary policy has been made possible because the fight against inflation over the past 2 1/2 years has been effective,” President Thomas Jordan said on Thursday. The SNB unveiled a lower forecast for consumer-price gains, seeing them no higher than 1.5% through 2026.
The SNB’s move foreshadows possible easing later this year by the Federal Reserve and European Central Bank, taking upward pressure off the franc and lessening the need for officials to resort to interventions that might further swell their large balance sheet.
By acting now, Jordan and his colleagues are avoiding the prospect of waiting for such global counterparts to move first. The SNB’s quarterly calendar features only half as many scheduled announcements as the Fed and ECB, and its next decision in June takes place after them.
The SNB “has used its leeway to support economic development by cutting interest rates early on,” said Raiffeisen Switzerland economist Alexander Koch. “However, the comparatively moderate level of interest rates, together with the robust economy, means that no overly aggressive easing should be expected in the further course of the year.”
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—Maeva Cousin, senior economist
The Swiss currency is one of the worst-performers across Group-of-10 peers this year on speculation the SNB would be among the first central banks to start easing policy to slow the franc’s gains. The central bank said in December that it may intervene in the FX market to weaken the currency, which had climbed to the strongest since 2015.
“It appears that the SNB has favoured using rates over FX intervention as a tool to guide inflation,” said George Moran, European economist at Nomura International Plc, adding that the central bank’s revised down inflation forecast suggests “a fundamental reassessment of the momentum of inflation.”
While the move was a surprise, banks including Barclays Plc, Citigroup Inc. had been preparing for a cut. Meanwhile, CFTC positioning data show leveraged funds, which include hedge funds, boosted their bets for a weaker franc to their biggest in a year last week.
The SNB has long been unafraid to jolt investors with abrupt action, and this cut adds another chapter to that history. Previous instances include its 2015 abandonment of the cap on the franc, and its surprise 50 basis-point hike in borrowing costs in 2022.
In this case, the outcome follows weeks of scant communication on monetary policy by officials, a vacuum in which some speculation on a rate cut began to build. Economists at Barclays Plc, Citigroup Inc. and Julius Baer & Co Ltd. were among a small minority predicting such a move.
The main focus of SNB headlines instead was Jordan’s surprise announcement on March 1 that he will leave the central bank later this year, sparking a succession race that, based on usual practice, is probably Vice President Martin Schlegel’s to lose.
The SNB decision follows that of the Fed on Wednesday to stick with its outlook for three rate cuts this year. The Norwegian central bank kept borrowing costs on hold on Thursday, and the same outcome is also expected of the Bank of England later in the day.
Swiss inflation that’s been significantly weaker than anticipated, and the franc’s persistent strength, supported the case for a cut. But rising rents and wages and a resilient economy were reasons to stay on hold.
The SNB now predicts inflation will average at 1.4% this year, 1.2% in 2025 and 1.1% in 2026.
“For some months now, inflation has been back below 2% and thus in the range we equate with price stability,” Jordan said. “According to our new forecast, inflation is also likely to remain in this range over the next few years.”
He also maintained that the SNB is “willing to be active in the foreign exchange market as necessary,” keeping the same wording from the central bank’s last decision. That could entail both buying and selling of foreign currencies, he said, adding the size of the SNB’s balance sheet doesn’t influence monetary policy decisions.
After years of fighting the haven currency’s strength, it then switched tactics in recent years as it sought to contain imported inflation.
The central bank had supported the franc by buying it up until the final quarter of last year, but analysts expect it to have stopped these interventions as the franc reached an all-time high against the euro in the last days of 2023.
Jordan and his colleagues — Martin Schlegel and recently appointed Antoine Martin — largely sidestepped questions on the SNB chief’s impending departure in September.
First Published: Mar 21 2024 | 11:39 PM IST