Switzerland makes a surprise cut in interest rates

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The Swiss National Bank announced a surprise interest rate cut on Thursday in a sign of policymakers' confidence about lower inflation.

The Swiss central bank cut its key interest rate by 25 basis points to 1.5 percent, making it the first central bank in a major Western industrialized country to do so in the current session, in which global inflation has risen in the wake of the coronavirus pandemic.

Other interest rate setters, such as the European Central Bank, remain concerned about continued upward pressure on prices and have kept interest rates steady in recent decisions.

Speaking on Wednesday, European Central Bank President Christine Lagarde refused to commit to future cuts, warning that inflation in the euro zone would persist for the rest of the year.

The Federal Reserve (US central bank) kept interest rates steady on Wednesday but indicated that significant cuts would take place later this year.

The Swiss franc fell by 1.2 percent against the US dollar after the Swiss Central Bank's decision.

“The easing of monetary policy has become possible because the fight against inflation over the past two and a half years has been effective,” said Thomas Jordaens, President of the Swiss Central Bank. “A few months ago, inflation returned below 2 percent and is therefore within the range that the Swiss Central Bank equates.” With price stability.

“According to our new forecasts, inflation is also likely to remain in this range over the next few years. In our decision, we take into account the decline in inflationary pressures as well as the appreciation of the Swiss franc in real terms over the past year.

Jordan is scheduled to leave the Swiss National Bank next September after 12 years at the helm of the bank. A successor has not yet been announced.

The Swiss inflation rate fell to its lowest level in two and a half years last February, at 1.2 percent. The Swiss economy has largely escaped the effects of the sharp price rises felt elsewhere in the developed world over the past two years. Inflation in the rich Alpine country peaked in August 2022 at 3.5 percent.

Economists had expected the SNB to keep interest rates steady on Thursday, although a minority expected a surprise cut, citing the bank's history of making bold decisions.

The weakness of the franc this year has led many to believe that the Swiss Central Bank will postpone cutting its key interest rate until the summer.

Citing nine consecutive months of inflation being on target, analysts at Capital Economics said the focus on the franc was overdone.

“The Swiss Central Bank has spent most of the past 15 years worrying about the overvaluation of the franc, and the franc remains very strong, even if it has fallen from the end of last year,” they noted, after anticipating an interest rate cut of a quarter of a percentage point. .

“We expect the SNB to cut interest rates at its September and December meetings, which will raise the interest rate to 1 percent, where we believe it will remain throughout 2025 and 2026,” said Adrian Pretigon, an economist at the research group.

Speaking in Bern at a press conference following the decision, Jordan cited concerns about Swiss economic growth playing a role in the decision to cut interest rates.

“Weak demand from abroad and the appreciation of the Swiss franc in real terms over the past year have a dampening effect,” he said. The franc hit an all-time high against the euro in late December. Its power restricts Switzerland's manufacturing industry, making its products more expensive for foreign consumers.

Additional reporting by Martin Arnold in Frankfurt