SNB Cuts Rate by Surprise Half Point to Stem Gains in Franc
The Swiss National Bank delivered a bigger-than-expected 50 basis-point interest-rate cut, quickening its easing to stem gains in the franc.
Officials lowered their key benchmark to 0.5% on Thursday, a step expected only by a small minority of economists surveyed by Bloomberg. Most anticipated only a quarter-point move.
The Swiss franc fell around 0.6% to 0.9344 per euro after the decision, pulling further away from a near-decade high hit against the euro last month.
“Policy rate cuts continue to be our main instrument should monetary policy have to be eased further,” SNB chief Martin Schlegel told reporters in Bern. “At the same time, we remain willing to intervene in the foreign exchange market as necessary.”
The central bank’s biggest reduction in the current cycle amounts to a show of force at Schlegel’s first decision as president, aiming to unsettle traders who have plowed money into the franc in recognition of its traditional role as a haven at times of geopolitical stress.
While the half-point move undermines the currency’s attractiveness to speculators, it also uses up precious ammunition. Borrowing costs are now only two quarter-point steps away from zero. Reaching that would leave officials on the cusp of choosing between market interventions to stem franc gains or else going negative — options which each come at a cost.
Having brought down borrowing costs at all four meetings of 2024 to one of the world’s lowest levels, the central bank’s rate is already back at the point it reached in September 2022, when it ended almost eight years of subzero monetary policy.
“Inflation risks are on the downside and the economy is growing below potential while Switzerland’s main export are struggling with structural and cyclical problems,” said Karsten Junius, chief economist at Bank J. Safra Sarasin in Zurich, who predicted the move and sees two further quarter-point cuts in the first half of next year. “Schlegel clearly signals that he is as determined to fight too low inflation as his predecessor.”
Officials are trying to stop inflation from undershooting the floor of their 0-2% target range. The franc last month touched the highest level against the euro in almost a decade, eroding Swiss consumer-price pressures by making imports cheaper.
Next year, reductions of electricity prices and rents are set to further push down inflation. Officials on Thursday delivered yet another downgrade to their forecast for consumer-price growth. It’s now expected to come in at 0.3% in 2025, down from a previous estimate of 0.6%.
“After today’s decision it’s hard to argue for a stronger franc,” said Jordan Rochester, head of head of macro strategy at Mizuho. “From here the SNB are running out of room for conventional easing and a ramp up of FX sales will be needed in 2025 to offset the 0.3% inflation they expect for 2025 and 0.8% for 2026.”
The decision precedes that of the European Central Bank’s later on Thursday. Policymakers there are expected to cut rates by a quarter point. Meeting only every three months, the bigger step by the SNB may help policymakers avoid being outpaced by their peers in Frankfurt.
Source : Bloomberg
