Switzerland’s central bank has surprisingly cut interest rates on Thursday. The Swiss National Bank (SNB) lowered its policy rate by 0.25 percentage points to 1.5%. The move sent the Swiss franc (CHF) lower against the dollar, while against the euro the franc dropped to an eight-month low. USD/CHF was up to its highest since November.
First major central bank to cut rates
This is the first major central bank to cut interest rates in the current cycle and took markets by surprise, as investors expected the SNB to hold rates today.
In its announcement, the central bank said that the rate cut was possible because “the fight against inflation over the past two and a half years has been effective.” In February, Swiss inflation fell to its lowest level in two and a half years at 1.2%. The fall was helped by a weakening franc and is within the SNB’s mandated target range.
The SNB added: “For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability. According to the new forecast, inflation is also likely to remain in this range over the next few years.”
With inflationary pressures easing, the SNB considered that the decision was appropriate as it will also boost economic activity. The bank has also revised down its forecasts for future inflation and anticipates restraints to growth from a strong Swiss franc and weaker demand from abroad.
First rate cut by the SNB in 9 years
This was the first rate cut by the SNB in 9 years. The move shocked the markets as the majority of analysts expected the SNB to keep rates on hold at 1.75%. The easing comes as Swiss inflation dropped to 1.2% in February, for the ninth month in a row, which shows that price stability has been achieved. The SNB noted that inflation is within a range that equates with price stability and is expected to remain in this range over the next few years.
“A brave move”
Economists touted the SNB’s move as bold, especially when most central banks advise caution and tread carefully. They noted that it was “a brave move to go before the ECB and Fed, although the SNB will not see it that way, and they probably believe the other central banks will also cut rates later this year.” Markets have now quickly priced in further rate cuts by the SNB with the bank’s policy language signalling to possibly another rate cut in June.
The Swiss National Bank’s announcement comes ahead of the Bank of England’s monetary policy decision which is widely expected to remain on hold despite easing inflationary pressures. Also on Thursday, Norway’s central bank held rates steady at 4.5%, after the US Federal Reserve kept rates the same on Wednesday while reiterating its expectations for three rate cuts in 2024.