Swiss central bank cuts interest rates by a quarter point in third quarter of year

The Swiss National Bank on Thursday took a third step toward easing monetary policy this year, cutting its key interest rate by 25 basis points to 1.0%.

The cut, which had been anticipated by 30 of 32 analysts surveyed in a Reuters poll, marked the SNB’s third interest rate reduction in 2024.

It was the first major Western central bank to cut interest rates in March.

The third cut comes amid similar signals from the European Central Bank and the US Federal Reserve, which last week took the long-awaited step of cutting its interest rates by 50 basis points. Domestically, Swiss inflation remains subdued, with the latest data pointing to an annual increase of 1.1% in August.

Speaking to CNBC’s Silvia Amaro on Thursday, SNB Chairman Thomas Jordan, who is leaving the central bank at the end of this month, acknowledged that “further rate cuts may be necessary to stabilize inflation within the range of price stability over the next three months,” but declined to reveal how many policy easing interventions would be necessary.

“In December, the new inflation forecast will tell us exactly in which direction monetary policy should then be adjusted,” he said.

The bank lowered its inflation forecast “significantly lower” than its June guidance, citing the strength of the local currency, weaker oil prices and electricity price cuts announced for next January.

The new outlook puts average annual inflation at 1.2% for 2024, 0.6% for 2025 and 0.7% for 2026, compared with 1.3%, 1.1% and 1.0% forecast in June for the respective periods.

The Swiss franc gained ground against major currencies following the latest interest rate decision. The US dollar and the euro fell by almost 0.14% and 0.16% against the Swiss currency, respectively, which met ING analysts’ expectations that the cut would lead to an “outperformance” of the Swiss currency.

The strengthening of the Swiss currency in August prompted one of the country’s largest associations, the technology manufacturers’ group Swissmem, to urge the SNB to “act soon, in accordance with its mandate” and ease the pressures limiting local companies.

“This new exacerbation comes at a delicate moment for one of the main export industries: after a difficult period of more than a year, a slow recovery was in sight. If the upward pressure cannot be contained, these hopes will dissipate,” Swissmem said at the time.

The SNB acknowledged that the broader recovery trend of its currency was a key contributor to Thursday’s decline.

“Inflationary pressure in Switzerland has again eased significantly compared with the previous quarter. This decrease reflects, among other things, the appreciation of the Swiss franc over the past three months,” the statement said.

“The SNB’s monetary policy easing today takes into account the reduction in inflationary pressure. Further cuts in the SNB’s policy rate may be necessary in the coming quarters to ensure price stability in the medium term,” he added.

Some analysts have questioned whether Switzerland is on track to combat deflation, a rare ailment among major Western economies that have been hit hard by meteoric price increases since the Covid-19 pandemic.

“This year, the SNB has consistently lagged behind the curve in its inflation forecasts, even though it has conditioned them to lower rates each time. The 0.6% forecast for 2025 is probably too close for a central bank willing to return to deflation to feel comfortable,” said Kyle Chapman, a currency markets analyst at Ballinger Group.

“I expect two more 25 basis point moves in December and March at the very least, mainly because I don’t see any near-term source of depreciation for the franc without a firmer stance on SNB intervention. We are getting back to zero relatively quickly,” Chapman added.

Jordan played down this risk on Thursday.

“If you look at our inflation forecasts, they remain within the price stability range, so I don’t see any risk of deflation in the near term,” Jordan told reporters, according to Reuters. He added that the central bank may nevertheless have to cut rates again to keep inflation within the 0-2% target range.

Adrian Prettejohn, European economist at Capital Economics, said the SNB statement suggested central bank policymakers had probably not used currency interventions “to any significant extent” but could soon resort to such measures.

“We believe the SNB will begin to consider the use of significant FX interventions once the policy rate falls to around 0.5%. At that point it will be a more balanced decision as to how much to rely on FX intervention versus further rate cuts to provide further support to monetary policy,” Prettejohn said in a note.

“We are also very clear that we can use the tool of foreign exchange intervention if necessary, and we will do so when we believe it is useful to have an impact on monetary conditions,” Jordan told CNBC’s Amaro.