Thu, Mar 21st 2024
In a surprising move, the SNB lowers its key interest rate amid declining inflation and a stronger Swiss franc.
The Swiss National Bank (SNB) surprises once again: it is one of the first central banks to lower its key interest rates again. The significant fall in inflation and the appreciation of the Swiss franc make this step possible.
The SNB is forging ahead and launching the interest rate turnaround before all other major central banks: the so-called SNB key interest rate will be lowered by 0.25 percentage points to 1.50 percent. By contrast, the US Federal Reserve and the European Central Bank (ECB) recently extended their interest rate pause.
In summer 2022, Chairman Thomas Jordan, who will leave the SNB in the fall, surprised all experts by raising the key interest rate for the first time before the ECB. At the time, it was fighting the sharp rise in inflation following the coronavirus pandemic.
Inflation in Switzerland has been on the decline for more than a year and last month stood at a low 1.2% in February. The SNB equates price stability with a maximum inflation rate of 2%.
According to the SNB, the recent decline in inflation was due to lower inflation for goods. At present, inflation is mainly determined by inflation in domestic services.
This achieved price stability, reducing risk, even with the key interest rate lowered to 1.50%. The monetary authorities emphasised in its latest forecast that the SNB assumes that inflation will average 1.4% in 2024.
And only 1.2 and 1.1% are also expected for 2025 and 2026. The fight against inflation over the last two and a half years has therefore been effective, the SNB concluded.
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 plays a role.
With stronger domestic currency, less inflation is imported from abroad. And the SNB is still prepared to be active on the foreign exchange market 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 central bank has even become slightly optimistic about domestic economic growth for 2024.
However, currency watchdogs emphasised that weak demand from abroad and the real appreciation of the Swiss franc were having a dampening effect. The forecast is also subject to significant uncertainties. The main risk is a weaker economic development abroad.
Last week we ran a story on the interest rate announcements coming from the SNB. Almost all experts were claiming that the rates were to stay the same. We were skeptical at the time but did not have information to the contrary. With how often experts get it wrong. The real question as to how the Swiss economy will react to this rate cut is far from being known. The Fed and the EU’s decision will soon follow.
©Keystone/SDA
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