Switzerland makes second interest rate cut as major economies diverge on monetary policy easing

The Swiss National Bank on Thursday trimmed its key interest rate by 25 basis points to 1.25%, continuing cuts at a time when sentiment over monetary policy easing remains mixed among major economies.

Two thirds of economists polled by Reuters had anticipated the SNB would decide in favor of a 25-basis-point-cut to 1.25%.

The Swiss franc weakened in the wake of the announcement, with the Euro gaining 0.3% and the U.S. dollar up 0.5% against the Swiss currency at 8:55 a.m. London time.

Following the Thursday decision, the Swiss central bank pegged its conditional forecast for inflation at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026. The figures assumes a SNB interest rate of 1.25% over the prediction period.

The country’s inflation flatlined at 1.4% in May after a bump up in April and is expected to average the same level across full-year 2024, according to the SNB’s latest projections.

The Swiss bank said it now anticipates economic growth of around 1% this year and around 1.5% in 2025, anticipating slight increases in unemployment and small declines in the utilization of production capacity.

“Over the medium term, economic activity should improve gradually, supported by somewhat stronger demand from abroad,” the SNB said.

In a June 14 note, analysts at Nomura had characterized a likely cut as a “finely balanced decision” and signaled that “underlying inflation momentum has remained weak which is likely to increase the SNB’s confidence that inflation will converge to the mid-point of its inflation target.”

Switzerland already has the second-lowest interest rate of the Group of Ten democracies by a wide margin, following Japan. It became the first major economy to cut interest rates back in late March and was earlier this month followed by the European Central Bank, and questions are now mounting over whether it will proceed with a third rate cut this year.

The SNB’s inflation forecast “suggests that there is still some restrictiveness to be squeezed out this year, and for me, that is a heavy signal that another rate cut is coming in September,” said Kyle Chapman, FX markets analyst at Ballinger Group. “I expect the SNB to follow up with a third cut next quarter, and there is potential for a fourth in December if there is still high conviction in the restrictive level of monetary policy.” 

He signaled that this outlook leaves the Swiss franc in a “vulnerable position.”

A Capital Economics analysis note out Thursday disagreed with the view, saying that the SNB is unlikely to proceed with further cuts this year in the current inflationary landscape.

“Looking ahead, we think that the SNB will not cut rates again this year as we are now no longer confident that underlying inflationary pressures are abating because labour compensation is growing at a strong rate and services inflation remains very sticky,” the note said.

Adrien Pichoud, chief economist at Bank Syz, also said that the SNB is “now done with the recalibration of its monetary policy and that it shouldn’t cut rates further this year.”

The U.S. Federal Reserve has yet to blink on interest rate reductions, and market participants will be following later in the Thursday session to see if the Bank of England takes the leap to trim, after U.K. inflation eased to the 2% target for the first time in nearly three years.