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The Swiss central bank has cut interest rates for the second consecutive meeting this year in response to falling inflation while signalling it is ready to intervene in currency markets to stem gains in the franc.
The quarter percentage point cut in the Swiss National Bank’s benchmark rate to 1.25 per cent on Thursday led to a fall in the franc, which dropped 0.4 per cent against the euro and 0.7 per cent against the dollar.
SNB chair Thomas Jordan said after the move that the bank was “willing to be active in the foreign exchange market as necessary”. The franc has appreciated in recent weeks as investors sought a haven amid uncertainty caused by France calling a snap election, which sparked a sell-off in European bonds.
The SNB was the first big western central bank to cut interest rates in March this year, as policymakers around the world start to reverse the global rate-raising cycle that began as inflation rose in 2021 and 2022.
The European Central Bank cut rates for the first time two weeks ago after several other monetary authorities in Europe lowered borrowing costs, including those in Sweden, the Czech Republic, Serbia and Hungary.
However, doubts over whether inflation has been completely tamed are making some central banks more cautious. The Bank of England was expected to keep rates on hold on Thursday and the US Federal Reserve is not expected to start cutting borrowing costs until September.
Norway’s central bank Norges Bank on Thursday left interest rates on hold at a 16-year high of 4.5 per cent and said that a first rate cut was not likely until next year.
The SNB gave few clues on whether it was likely to cut rates further, but slightly lowered its inflation forecast. It now predicts inflation will decline from 1.3 per cent this year to 1 per cent in 2026 and said “underlying inflationary pressure has decreased again compared to the previous quarter”.
Switzerland avoided the worst of the inflation surge that swept across Europe in the past couple of years. While Swiss inflation ticked up from an annual rate of 1 per cent in March to 1.4 per cent in May, it was still within the SNB’s target range of between zero and 2 per cent.
Economists are split over the likelihood of further rate cuts by the SNB, which are likely to depend on how much big central banks, including the ECB and the Fed, cut rates.
“We think more cuts are coming,” said Melanie Debono at Pantheon Macroeconomics. “We think the SNB will broadly match the total value of ECB cuts over the easing cycle, in a bid to keep the franc relatively stable against the euro and prevent significant disinflation.”
Swap markets are pricing in only 0.1 percentage points of further rate cuts by the SNB. George Moran, an economist at Nomura, said this seemed a “significant mispricing”, adding that “if Switzerland returns to the pre-pandemic paradigm of threatening deflation, the risks to the policy rate are even lower”.
