The Swiss national flag hangs from the Federal Palace, the Swiss parliament building, in Bern, Switzerland, on Thursday, December 13, 2018. The Swiss National Bank lowered its inflation forecasts and showed no inclination to abandon its crisis-era settings, citing the strength of the franc and rising global risks. Photographer: Stefan Wermuth/Bloomberg via Getty Images
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The Swiss National Bank on Thursday surprised the market with its decision to cut its key interest rate by 0.25 percentage points to 1.5%, saying national inflation is likely to remain below 2% for the foreseeable future.
Economists polled by Reuters expected the Swiss Central Bank to keep interest rates at 1.75%.
“For several months now, inflation has been back below 2%, and thus within the range that the SNB equates with price stability. According to the new forecasts, inflation is also likely to remain in this range over the next few years,” the bank said. . Swiss inflation continued to decline in February, reaching 1.2%.
The Swiss Central Bank also lowered its annual inflation forecast. The bank now expects inflation to average 1.4% in 2024, down from its estimate of 1.9% in December, and 1.2% for 2025, compared to the previous estimate of 1.6%. Its first forecast for 2026 puts average inflation at 1.1% over this period.
Following the announcement, analysts at Capital Economics said they expect two more SNB rate cuts over the course of this year, “with the bank looking more pessimistic and inflation likely to be lower than its expectations.”
“In fact, we believe inflation will come in lower than the new SNB forecasts indicate and will remain around the current level of 1.2% before falling below 1.0% next year. Accordingly, we expect the SNB to cut interest rates In September and September, Capital Economics analysts said in a note that the December meetings raised the interest rate to 1%, where we believe it will remain throughout 2025 and 2026.
The September meeting is likely to be the last under SNB President Thomas Jordan, who will step down at the end of that month after 12 years at the helm of the bank.
The Swiss National Bank said Swiss economic growth “is likely to remain modest in the coming quarters”, with GDP expected to grow by around 1% this year.
“Our outlook for Switzerland, as for the global economy, is subject to a great deal of uncertainty. The main risk is weak economic activity abroad. Momentum in the mortgage and real estate markets has weakened significantly in recent quarters,” the SNB said. “However, vulnerabilities in these markets remain.”
At the macro level, the SNB pointed to “moderate” global economic growth in the coming quarters, along with a likely decline in inflation thanks in part to restrictive monetary policy strategies. However, it acknowledged that there were “significant risks” and geopolitical tensions that could cloud the international economic horizon.
First to blink
Switzerland is the first advanced economy to cut interest rates after a prolonged period of high inflationary pressures, exacerbated by the impact of the Covid-19 pandemic on global trade and the Russian war in Ukraine. Switzerland was also affected by tensions in the banking sector last year, when the government intervened to facilitate UBS's takeover of struggling rival Credit Suisse.
The Swiss National Bank's announcement comes ahead of a monetary policy decision by the Bank of England, which is widely expected to leave monetary policy unchanged despite lower inflation.
Also on Thursday, the Norwegian Central Bank refused to back down, keeping interest rates steady at 4.5%. This comes after the US Federal Reserve on Wednesday kept interest rates steady after its meeting in March and reiterated its forecast for three interest rate cuts in 2024.
