The Swiss Times - Swiss News in English

SNB pulls off surprise coup with key interest rate cut

Updated at 21 Mar 2024 2:40 pm

The Swiss National Bank (SNB) is the first of the leading central banks to herald a turnaround in interest rates. On Thursday, the monetary authorities led by Thomas Jordan announced that they would be lowering interest rates.

The so-called SNB key interest rate will be lowered by 0.25 percentage points to 1.50%. The SNB is thus once again decoupling itself from the other major central banks. Both the US Federal Reserve and the European Central Bank (ECB) recently continued their interest rate pause.

"The effect of our monetary policy was better than we had expected," said Jordan, explaining the decision to the media on Thursday. From June 2022, the SNB raised the key interest rate from -0.75 percent to 1.75 percent in five steps and then left it unchanged twice.

So now it's time for the first cut. The SNB had already surprised all experts in summer 2022 with its first key interest rate hike before the ECB.

Successful SNB policy

Monetary policy has made a "significant" contribution to pushing inflation back into the SNB's desired target range of between 0 and 2 percent, the SNB Governing Board explained.

Inflation in Switzerland has been on the retreat for more than a year - the last time it was a low 1.2% was in February. The SNB equates price stability with a maximum inflation rate of 2 percent.

According to SNB forecasts, it is unlikely to be much higher in the further course of the year. The SNB now assumes that inflation will average 1.4% in 2024. Values of 1.2 and 1.1 percent are expected for 2025 and 2026.

Inflation is currently being driven primarily by inflation in domestic services, said Jordan. And overall, the picture looks much better than three months ago. One reason for this is that no further increase in the hypo reference interest rate is now expected - which will limit further second-round effects.

Swiss franc as a weapon against inflation

However, with its first interest rate cut since January 2015 - when the minimum euro exchange rate was lifted - the SNB is not only taking into account the reduced inflationary pressure. The real appreciation of the Swiss franc also played a role.

Because with a stronger domestic currency, less inflation is imported from abroad. And the SNB does not shy away from using this instrument again immediately if necessary, emphasized Jordan. "We have no inhibitions about expanding the balance sheet if necessary."

In the past, the SNB has indeed reduced its very high mountain of foreign currency somewhat - sales of euros, dollars and the like were intended to strengthen the franc in order to combat inflation. In 2023, foreign currencies worth almost CHF 133 billion were sold.

However, the interest rate cut also supports economic development, the SNB emphasized on Thursday. The central bank has even become slightly more optimistic about domestic economic growth for 2024.

The SNB surprised many economists with its move. The majority had assumed that it would not cut interest rates until June, in step with the Fed and others. The fact that it has now demonstrated its independence once again has earned it the new nickname "Surprise National Bank" from one market participant.

©Keystone/SDA

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