The Swiss National Bank on Thursday, December 12, decided to cut its key interest rate by 50 basis points.
It is worth noting that the scale of the mentioned decision exceeded preliminary expectations. Experts predicted that the Swiss financial regulator would act within the framework of a more moderate approach. The relevant point of view was based on such circumstances of the current economic reality in the mentioned country as the ongoing tussle with depressed inflation and a strong Swiss franc.
As a result of Thursday’s decision, the main rate of the Swiss central bank was fixed at 0.5%. Most economists surveyed by the media predicted that the financial regulator would cut the mentioned figure by 25 basis points.
It’s worth noting that Switzerland became the first major economy to begin easing monetary policy in March. In the current year, the financial regulator of this country made four decisions on cutting interest rates. The relevant actions of the Swiss National Bank are aimed at taming the franc’s appreciation and decline in consumer prices.
On Thursday, the mentioned financial regulator said that underlying inflationary pressure in the current quarter had decreased again. It was also noted that the next easing of monetary policy takes into account this circumstance. A statement was made that the Swiss National Bank continues to monitor the situation closely. The financial regulator stated its readiness, if necessary, to make adjustments to monetary policy to ensure that inflation remains in the consistent price stability range in the medium term.
The Chairman of the Swiss National Bank, Martin Schlegel, on Thursday, during a conversation with media representatives, attributed the next cutting of interest rates to a lower than previously expected inflation rate. He also noted that after this decision, the probability of negative interest rates in the future has decreased.
The Swiss National Bank also published its new forecast for conditional inflation, which turned out to be lower than the September version. In this case, lower-than-expected print for oil products and food is reflected. The financial institution also predicts little changes in the medium term.
The new forecast of the Swiss National Bank provides that the average annual inflation in the country in the current year will be 1.1%. In 2025, the corresponding indicator is expected to reach 0.3%. The financial institution also predicts that in 2026 the average annual inflation rate will be 0.8%. Moreover, it is envisaged that the interest rate of the Swiss National Bank will remain at 0.5% during the entire forecast horizon.
Kyle Chapman, FX markets analyst at Ballinger Group, expects a new lowering of borrowing costs. According to the expert, zero interest rates will be fixed in June. Kyle Chapman said that the conditional forecast, which provides for the cost of borrowing at 0.3%, is probably too close to comfortable for policymakers, especially given the record of revising these down at every single meeting this year. The expert noted that Switzerland can withstand a temporary period of inflation that goes beyond the range of price stability of the local financial regulator from 0% to 2%. At the same time, Kyle Chapman said that the Swiss National Bank aims to increase consumer prices within that interval in the medium term. The expert did not rule out the possibility of resorting to negative interest rates to achieve the corresponding goal. Kyle Chapman noted that such rates are unpopular and no one likes them, including the Swiss National Bank. At the same time, according to the expert, it is not necessary to exclude the possibility of the corresponding decision.
Kyle Chapman also said that the franc is likely to come under even stronger pressure as the European Central Bank outpaces the Swiss National Bank in cutting interest rates, and uncertainty around Donald Trump’s new presidential term heightens safe haven flows.
Martin Schlegel noted the importance of developments abroad for Swiss finance. When asked about Donald Trump’s return to the White House as an impact factor, he said that free trade and open borders are very important for Switzerland as a small open economy. It is worth noting that Mr. Trump has repeatedly stated his intention to raise tariffs on imported goods. The implementation of the relevant plans will mean an increase in tension in the global trade space.
Last month, inflation in Switzerland was fixed at 0.7%. It is worth noting that in October this figure was 0.6%.
Against the background of the political turbulence observed in the eurozone, the franc, which is perceived by many as a safe haven, is largely resisting the surrendering ground, despite the lowering of borrowing costs by the Swiss National Bank. Its rally has loomed over the outlook for Swiss export opportunities, which has already decreased due to weak demand abroad and the low level of sales orders.
In October, the business climate index produced by industry association Swissmechanic fell to its lowest mark since January 2021. At the same time, the industry association expects further declines in orders, sales, and margins in the fourth quarter.
Another industry association Swissmem last month announced an ongoing downturn in the Swiss technology sector. Separately, in this case, it was noted that the main indicators do not signal a recovery in the near future. It was also underlined that, against the background of the current state of affairs, efforts should be intensified at the political level to facilitate the access of the Swiss export economy to growing markets.
In the third quarter of the current year, the Swiss economy showed growth of 0.2%. In the previous quarter, this indicator increased by 0.4%. The result for the third quarter is due to the negative dynamic of the industrial sector.
As we have reported earlier, ECB Cuts Interest Rates by Quarter Point.
