The Swiss National Bank (SNB) made an unexpected policy adjustment on Thursday, cutting its benchmark interest rate by 50 basis points. This larger-than-expected cut defied the forecasts of most economists, who had expected a more modest 25 basis point reduction. The move, aimed at combating low inflation and the continued strength of the Swiss franc, raises the central bank's main rate to 0.5%.
This decision marks Switzerland's fourth rate cut this year, as the country remains the first major economy to adopt a more accommodative monetary policy in 2024. The SNB has struggled to curb the appreciation of the franc and address falling crude oil prices. consumption, issues that have weighed on the nation. economy.
“Underlying inflationary pressures eased again this quarter,” the SNB said in a statement after its first meeting under new president Martin Schlegel. “The current easing of monetary policy reflects this development.” Schlegel underlined the bank's commitment to keeping inflation within the medium-term target range, saying further adjustments would be made if necessary.
A cautious approach to inflation
The rate cut follows lower-than-expected inflation data, with Swiss inflation standing at 0.7% year-on-year in November, up slightly from 0.6% in October. While inflation remains below the SNB's target range of 0% to 2%, Schlegel noted that Switzerland could tolerate a short period of inflation outside this range if necessary.
The SNB also published a revision of its inflation forecast, lowering its projections due to weaker-than-expected price movements in the food and energy sectors. The central bank now expects an annual inflation rate of 1.1% for 2024, falling to 0.3% in 2025 and rising slightly to 0.8% in 2026. These figures assume that the interest rate remains at 0.5% for the entire forecast period.
Despite the low inflation outlook, Schlegel did not rule out the possibility of reintroducing negative interest rates if conditions worsened. “Negative interest rates are unpopular,” he acknowledged. «The SNB doesn't even like them. But we cannot rule out the need for negative rates in the future should they prove necessary to maintain price stability.”
The strong franc and its economic impact
The persistent strength of the Swiss franc has posed challenges to the country's export-based economy. Despite the rate cuts, the currency has largely resisted significant depreciation. The franc weakened slightly on Thursday, with the US dollar gaining 0.4% and the euro appreciating 0.57%.
The appreciation of the franc has dampened the outlook for Swiss exports, which are already suffering from weakening foreign demand and falling sales orders. In October, the business climate index from Swissmechanic, an industry association, fell to its lowest level since the start of 2021, citing expectations of further declines in orders, sales and profit margins during the final quarter of the year. 'year.
Swissmem, another industry group, reported persistent difficulties in the technology sector in November. The organization highlighted the need for policy initiatives to improve access to growing markets, particularly through free trade agreements, to support the country's export economy.
The Swiss economy as a whole also showed signs of a slowdown. Official data from late November revealed that GDP grew just 0.2% in the third quarter, following a modest 0.4% increase in the previous quarter. This slow growth has put additional pressure on the industrial sector, further complicating the SNB's efforts to stimulate the economy.
A measured response to global uncertainty
Schlegel highlighted the importance of external factors in shaping Swiss monetary policy. Asked about the potential impact of Donald Trump's return to the White House in January, he noted that Switzerland's open economy relies heavily on free trade and international cooperation. “As a small open economy, free trade and open borders are very important to us,” he said.
The SNB does not rule out intervention in the foreign exchange market to avoid excessive appreciation of the franc. Schlegel hinted that the central bank could use its substantial balance sheet to stabilize the currency if necessary, although no immediate intervention plans have been announced.
The Swiss central bank's decision comes at a time when other large economies are also adjusting their monetary policies. Later on Thursday, the European Central Bank was expected to announce its own rate cut by 25 basis points, a move that could further influence the franc's trajectory.
Mixed reactions and future prospects
The SNB's larger-than-expected rate cut sparked mixed reactions from analysts and market participants. Some, like Kyle Chapman, foreign exchange market analyst at Ballinger Group, believe further cuts are likely in the near term. “Zero interest rates could be on the table as early as June,” Chapman said, adding that policymakers may find their current inflation forecast of 0.3% for next year uncomfortably low.
However, Schlegel remains confident in the SNB's ability to meet these challenges. He reiterated the bank's commitment to maintaining price stability and adapting its policies as needed.
The future of Swiss monetary policy will strongly depend on the evolution of inflation, the franc and the global economic environment in the coming months. For now, the SNB's decisive action demonstrates its determination to meet these challenges head on, leaving the door open for further adjustments if necessary.
As the Swiss economy grapples with modest growth and external uncertainties, the central bank's approach will remain a key focus for businesses, investors and policymakers.
