SNB surprises with significant interest rate hike
Published: Thursday, Dec 12th 2024, 14:50
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The Swiss National Bank (SNB) surprised the markets once again on Thursday with an interest rate cut of 50 basis points to 0.50 percent. Despite this already bold move, the currency guardians are keeping the door open for further cuts.
For SNB Chairman Martin Schlegel, a reduction of this magnitude was necessary because inflation was once again lower than expected, as he said in an interview with journalists on Thursday. The lowered forecast for 2025 mainly reflects the lower than expected inflation in oil products and food. "Energy and oil prices in particular have surprised us to the downside."
Accordingly, the monetary authorities have once again updated their inflation forecasts. They now expect inflation of 1.1% for the current year, compared to 1.2% in September. The adjustment for next year is the most significant. For 2025, they still expect inflation of 0.3 percent. The forecast in September was twice as high at 0.6 percent. The forecast for 2026 is now 0.8 percent instead of 0.7 percent.
Price stability is the top priority
As SNB Chairman Schlegel emphasizes, price stability, i.e. inflation of 0 to a maximum of 2 percent, is guaranteed with the key interest rate lowered to 0.50 percent. And guaranteeing price stability remains the central bank's top priority.
Schlegel therefore does not rule out further interest rate cuts in the future. When asked whether the SNB could also envisage negative interest rates, the SNB chief is somewhat more evasive. Nobody wants negative interest rates. "But we can't rule them out." In Schlegel's opinion, the probability of this happening has decreased with the step that has now been taken.
Nevertheless, the SNB will of course continue to monitor the situation closely and adjust its monetary policy if necessary to ensure that inflation remains within the price stability range in the medium term, Schlegel continued.
Interest rates remain the preferred instrument
At the same time, Schlegel makes it very clear that the preferred instrument of the members of the Executive Board is interest rates. They would remain active on the foreign exchange market if necessary. Earlier statements that foreign exchange market interventions are also an integral part of policy were not repeated. "We can also influence exchange rates with the key interest rate."
In addition to persistently low inflation, economic growth is also a cause for concern for the monetary authorities. The SNB is sticking to its previous estimate that the Swiss economy will grow by 1% this year. For 2025, it still expects gross domestic product (GDP) to grow by between 1 and 1.5 percent. In September, the forecast was still around 1.5 percent.
Weak foreign business a burden
"This is mainly due to the gloomy economic outlook abroad," emphasized Petra Tschudin, member of the Governing Board, in a video interview with AWP. In the morning communiqué, the SNB also emphasized that the risks for the economy had recently increased. This includes uncertainty about the future shape of economic policy in the USA.
The majority of analysts were surprised by the major step. According to one commentary, the new head of the SNB has already set an exclamation mark at the beginning of his term of office with this bold interest rate cut.
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