Swiss Central Bank Takes Unprecedented Step, Cuts Rates Ahead of Global Peers
On March 21, the Swiss National Bank (SNB) made a surprising move by cutting its main interest rate by 25 basis points to 1.50%. This decision marked the first rate cut by the SNB in nine years and made it the first major central bank to backtrack on tighter monetary policy aimed at addressing inflation.
The SNB also reduced its interest rate on sight deposits to 1.50%. This rate cut came amidst the backdrop of Thomas Jordan announcing his upcoming departure as Chairman of the SNB in September.
This unexpected decision by the SNB caught markets off guard, leading to a decrease in the value of the Swiss franc against the euro and a decline in Swiss government bond yields. Conversely, Zurich-listed shares experienced a boost.
The move was prompted by a drop in Swiss inflation to 1.2% in February, remaining within the SNB’s target range of 0-2% for the ninth consecutive month. SNB Chief Economist Karsten Junius noted that the central bank’s effective measures against inflation allowed for this monetary policy easing.
Thomas Jordan highlighted that the easing of monetary policy was facilitated by reduced inflationary pressure and the appreciation of the Swiss franc over the past year. The rate cut aimed to support economic activity, considering the challenges posed by the strong franc.
The decision was welcomed by Swiss industries, which had urged the central bank to address the strong franc that was impacting their profits. Analysts anticipate more rate cuts in the future, viewing Thursday’s move as a logical consequence of current economic conditions.
The SNB’s decision contrasts with actions taken by other central banks. While the European Central Bank is expected to reduce borrowing costs in June, the U.S. Federal Reserve left its benchmark interest rate unchanged but maintained its outlook for three rate cuts this year.
Despite the unexpected nature of the SNB’s move, economists view it as a bold decision given the central bank’s usual caution. The SNB adjusted its inflation forecasts downward, expecting inflation to average 1.4% in 2024, down from the previous forecast of 1.9%. Similarly, inflation is projected to finish next year at 1.2%, down from the earlier prediction of 1.6%.
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