Switzerland makes second interest rate cut as major economies shift

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

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

The Swiss franc weakened following the announcement, with Euro gains 0.3% AND The US dollar rose 0.5% against the Swiss currency at 8:55 am London time.

Following Thursday’s decision, the Swiss central bank set its conditional inflation forecast to 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026. The figures assume an SNB interest rate of 1.25% over the forecast period .

The country’s inflation fell to 1.4% in May after a rise in April and is expected to average the same level throughout 2024, according to the latest SNB forecasts.

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

“In the medium term, economic activity should gradually improve, supported by somewhat stronger external demand,” the SNB said.

Speaking to CNBC’s Silvia Amaro, SNB President Thomas Jordan highlighted the impact that inflationary headwinds had on the bank’s recent decision-making.

“[We have] We also have inflationary pressures that have decreased slightly [a] the strong Swiss franc, and we have increased uncertainty globally. So, we came to the conclusion that, given those circumstances, it is good for the rates to be lowered by 25 basis points,” he said.

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

“There are large fluctuations in the exchange rate that can have an impact, or indeed large changes in [the] the economic outlook of the world economy,” he noted. “The Swiss franc appreciated somewhat against our last monetary meeting. The exchange rate has an impact on monetary conditions and we take this into account.”

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

Switzerland already has the second lowest interest rate of the group of ten democracies by a wide margin, after Japan. It became the first major economy to cut interest rates at the end of March and was followed earlier this month by the European Central Bank, and questions are now mounting whether it will follow through with a third rate cut this year.

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

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

A Capital Economics analysis note on Thursday disagreed, saying the SNB is unlikely to pursue further cuts this year in the current inflationary landscape.

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

Adrien Pichoud, chief economist at Bank Syz, also said the SNB “has already finished recalibrating its monetary policy and should not cut rates further this year.”

The US Federal Reserve has yet to turn a blind eye to interest rate cuts and market participants will watch later in Thursday’s session to see if the Bank of England moves to cut, as inflation in the UK The United eased to the 2% target for the first time in nearly three years.