The Swiss National Bank has announced a significant cut in its interest rate, reducing it by 50 basis points to 0.5%. This is the largest reduction in almost 10 years and comes as a preemptive measure to stay ahead of expected cuts by other central banks and to prevent the Swiss franc from rising further.
The decision was made by the SNB’s new chairman, Martin Schlegel, in his first policy meeting. This is a significant acceleration from the previous policy of former chairman Thomas Jordan, who oversaw three smaller cuts of 25 basis points this year. The move was widely predicted by markets, but economists had expected a smaller cut of 25 basis points.
The main reason for the rate cut is the low inflation rate in Switzerland, which has been within the SNB’s target range of 0-2% since May 2023. However, there is still uncertainty about future price developments, and the SNB has lowered its inflation forecast for 2025. This decision also comes in the wake of rate cuts by other central banks, such as the European Central Bank and the US Federal Reserve.
The appreciation of the Swiss franc, which is seen as a safe-haven currency, has been a concern for the SNB as it makes Swiss exports more expensive. This is particularly challenging for exporters who are already facing subdued demand in Europe and China. By cutting rates, the SNB hopes to make the franc less attractive and support the Swiss economy.
The SNB now expects a growth rate of between 1% and 1.5% for 2025, lower than its previous forecast of 1.5%. It has also lowered its inflation forecast for the next few years. However, the central bank has softened its forward guidance for further rate cuts, indicating that this may be the last cut for now.
Overall, this decision by the SNB is a response to the current economic climate and aims to support the Swiss economy by countering low inflation and preventing excessive strength of the franc. It remains to be seen how effective this rate cut will be in achieving these goals.