The Swiss National Bank decided to cut interest rates for the second meeting in a row.
Currently, the mentioned country’s financial regulator is a kind of advanced organization at the forefront of lowering borrowing costs globally. Nowadays, the Swiss National Bank adheres to an action strategy involving adopting measures to ease monetary policy, as part of its efforts to battle with low inflation and a strengthening franc.
In Zurich, officials representing the financial authorities of the specified country decided to cut their benchmark by 25 basis points. At the moment the corresponding indicator is at 1.25%. The decision to continue the implementation of the monetary policy easing strategy was made by officials of the Swiss National Bank on Thursday, June 20. Among investors, there was a sort of limited expectation that the mentioned financial regulator would lower the cost of borrowing. The vast majority of economists surveyed by the media predicted that the Swiss National Bank would leave the benchmark at the same level.
It is worth noting that the Swiss financial authorities have also revised their vision of what the dynamic of inflation in this country will be in 2026. In their opinion, the corresponding figure in the mentioned year will be 1%. It is worth noting that this forecast regarding the growth rate of the cost of goods and services is an improved vision of the prospects compared to the previous version of expectations. The Swiss financial regulator predicts that inflation at the end of the current year will be equal to 1.3%. It is also expected that the mentioned indicator will be 1.1% in 2025.
After the Swiss National Bank officially announced its decision on the benchmark, the franc found itself on a downward trajectory, declining by about 0.4% versus the euro and falling by 0.7% against the dollar. It is worth noting that this week the Swiss national currency showed significant growth, reaching a four-year high. It should be clarified that in this case the exchange rate of the franc against the euro is implied. The corresponding dynamic was observed against the background of the unfavorable political situation in France, due to which the demand for so-called safe-haven assets increased.
In March, the Swiss financial regulator made the first decision on lowering the cost of borrowing. This decision also was the first in the current cycle among the central banks of advanced economies. Now the Swiss financial regulator is doubling down on the appropriate approach. It is worth noting that central banks in other countries are taking a more cautious approach in the context of monetary policy easing. Some financial regulators canceled or shrank their preliminary plans for cutting interest rates because inflation turned out to be more stable compared to preliminary expectations regarding the dynamic of the corresponding process. Also, many central banks want to receive more information signaling that the growth in the cost of goods and services is on a stable trajectory toward their targets before deciding to ease monetary policy. The Federal Reserve has reduced the number of interest rate cuts planned for the current year. The European Central Bank has already made the first decision on lowering the cost of borrowing, but, likely, it will not repeat this move shortly. It is worth noting that currently there is a high level of mutual impact of financial regulators’ actions on each other and the state of affairs in the space of economic reality in different countries. In the era of globalization, which provides for a certain degree of unification and an increase in the level of interconnection of processes occurring in miscellaneous states, certain actions generate what can be described as a kind of ripple effect. In the context of monetary policy, this specificity of the current configuration of international economic reality means that the decision of one central bank is to some extent a factor impacting the concept of activities of another financial regulator.
Joachim Klement, head of strategy, accounting, and sustainability at Liberum Capital, says that there are clear reasons why the Swiss National Bank would like to cut interest rates faster than the ECB, mentioning in this context such factors impacting the relevant decision as lower inflation and the franc exchange rate. The expert said that the Swiss financial regulator is currently acting boldly but at the same time contributing to the growth of inflation next year.
On Thursday, the central bank of Norway also decided on monetary policy. The financial regulator of this country has left the cost of borrowing unchanged. Nowadays, this state’s key rate is at 4.5%. Officials of the central bank of Norway also said that they are likely to be forced to keep interest rates at the highest level since 2008 until the end of the current year.
Currently, there are also widespread concerns about the further dynamic of the inflationary process. It is widely believed in the expert community that these sentiments, formed in the context of the current circumstances of economic reality, will become a deterrent to the decision to ease monetary policy by the Bank of England.
Maeva Cousin says that the Swiss National Bank, most likely, will decline the pace of its actions and finally cut the benchmark to 1% in December. The expert explains this forecast by saying that rates get closer to the estimate of the natural rate. At the same time, Maeva Cousin says that the revision of the inflation forecast by the Swiss National Bank indicates that another easing of monetary policy in September remains a realistic scenario. The expert also noted that the probability of materialization of the mentioned scenario will increase significantly if the situation of political uncertainty in Europe remains within the current configuration of this state of affairs.
Before deciding the benchmark, officials of the Swiss National Bank followed the tactic of refusing to make public statements on the relevant issue. Against this background, there was a misunderstanding among investors about what actions the mentioned financial regulator would take as part of its approach to monetary policy. At the same time, expectations of lower borrowing costs were spreading in the specified environment. This point of view, which eventually turned out to be correct, was based on factors such as the strengthening of the franc and the inflation rate, which is low in the context of average international indicators of price growth for goods and services. It was also widely believed that the Swiss National Bank could abandon lowering the cost of borrowing in 2024. Proponents of this point of view justified their vision of the likely actions of the Swiss financial regulator by increasing consumer prices.
The president of the Swiss National Bank, Thomas Jordan, during a speech to reporters in Zurich, said that underlying inflationary pressure has decreased further compared with the previous quarter owing to somewhat lower second-round effects. He also noted that the strengthening of the franc due to political uncertainty in Europe increases ambiguity about the upward dynamic of the inflationary process. Moreover, Thomas Jordan said that the Swiss National Bank is ready to be active in the foreign exchange market as needed.
Kyle Chapman, FX markets analyst at Ballinger Group, says that this year the Swiss financial regulator may make two more decisions on monetary policy easing. According to the expert, appropriate decisions can be made in September and December. Kyle Chapman justifies the realism of this forecast by saying that the Swiss National Bank has changed its expectations regarding the dynamic of inflation.
Analysts at Capital Economics disagree with the mentioned point of view. In their note published on Thursday, they noted that in the context of the current inflationary process, the probability that the Swiss National Bank will continue to make decisions on lowering borrowing costs in 2024 is low. Also, analysts are not sure that underlying inflationary pressures are easing since labor compensations are showing high growth rates, and at the same time, very sticky inflation is observed in the service sector.
Adrien Pichoud, chief economist at Bank Syz, agrees with the point of view of Capital Economics experts. The expert suggests that the Swiss National Bank has already completed the recalibration of its monetary policy and will no longer cut interest rates in the current year.
HSBC analyst Chantana Sam noted that probably as early as last month, Thomas Jordan was concerned about the franc weakening too quickly. At the same time, the Swiss national currency showed a sharp increase after the elections to the European Parliament held less than two weeks ago. As above mentioned, the current political situation in Europe is not a state of affairs that can be described as stable and unambiguous from the point of view of subsequent prospects. Snap elections were called in France. In Germany, after the elections to the European Parliament, the positions of the three-party federal government are weakening. Chantana Sam noted that the strengthening of the franc against the background of political uncertainty in Europe has become a significant factor contributing to the easing of the monetary policy of the Swiss financial regulator.
A higher franc reduces the prices of major imported goods from the neighboring eurozone. This factor puts downward pressure on prices in general and increases the burden on the Swiss industry, which is export-oriented.
Currently, the Swiss banking sector and the local financial services area are not going through the best of times. The impact factor on this state of affairs was the collapse of the Credit Suisse investment lender last year. Also, the Swiss banking sector and the financial services area have faced a significant increase in competition from other such hubs, including Hong Kong and Singapore. It is worth noting that the Swiss banking system is one of the most significant components of the economy of this country.
