The Swiss National Bank (SNB) has made an unexpected decision to cut its key interest rate by 25 basis points.
The mentioned financial regulator was at least several months ahead of similar organizations in other countries of the world as part of the monetary policy easing action. It is worth noting that the central banks of many countries are still very cautious and highly restrained about the prospects for making changes in the approach to interest rates. In this case, one of the main barriers to starting monetary policy easing is the need to make sure that inflation is on a trajectory towards the authority’s targets. Also in Europe and the United States, officials say that to decide on lowering interest rates, it is necessary to explore the situation in the labor market and record signs of its positive dynamic.
The SNB lowered the benchmark to 1.5%. This decision is noteworthy not only because the officials of the specified financial institution decided to take a step that their colleagues have so far considered exclusively in the context of possible future prospects. A special circ*mstance also lies in the fact that the mentioned interest rate cut is the first such action for one of the most traded currencies in the world after the end of the coronavirus pandemic. The media note that the decision of the central bank is also largely related to the desire of the authorities to prevent the strengthening of the franc.
Some investors considered a highly likely probability of an interest rate cut in March. This point of view was not widely accepted, but it turned out to be true, which confirms the thesis that the truth is not always what belongs to the category of majority opinion. At the same time, most economists predicted that the SNB would not make such decisions until at least June. The financial regulator was able to surprise in this case.
After data in the information space merged that the SNB lowered the interest rate, the franc fell by 1% against the euro. This figure is the lowest since July last year. The franc also showed a 1.2% drop against the US dollar. In this case, the Swiss national currency made a movement, the endpoint of which was a four-month low.
The president of the SNB, Thomas Jordan, said that monetary easing has become a realistic scenario for the central bank as a result of the fact that the efforts undertaken within the framework of the strategy to combat inflation over the past two and a half years have been effective.
The financial regulator also released a forecast for the dynamic consumer prices. According to SNB experts, this figure will exceed 1.5% by 2026.
The decision of the Swiss financial regulator may have a certain impact on the actions of officials of the Federal Reserve System and the European Central Bank. If this assumption turns out to be correct, the pressure on the franc, which is still on a growth trajectory, will ease. Also, softening the monetary policy of the financial regulators of the United States and the EU will reduce the need for SNB officials to use the intervention mechanism. It is worth noting that such a method of action increases the balance sheet, which already has a volume beyond the acceptable category, but at the same time is not critically large, although there are risks of a continuation of the negative tendency.
Thomas Jordan and his colleagues decided to leave the conditional group of financial officials who, as part of the approach to regulating the concept of monetary policy, prefer a position of expectation. The SNB has made a decision that is consistent with a strategy of swift and decisive action. Not all central banks are ready for such methods. The SNB also stopped participating in monitoring which financial regulator would be the first to lower interest rates, to then coordinate and plan its activities, focusing on the forming experience of colleagues. The decision of the Swiss central bank required a certain amount of courage, and this parameter was available in this case.
Raiffeisen Switzerland economist Alexander Koch said that the SNB used its freedom of action to support economic development by lowering interest rates at an early stage. At the same time, the expert noted that the relatively moderate level of the mentioned indicator in the format of coexistence with a stable economic situation reduces the likelihood that during 2024 decisions will be made on an intensive change in monetary policy towards easing.
Maeva Cousin, senior economist at Bloomberg Economics, says that the SNB acted faster than most market participants expected. According to the expert, the main driving force behind the decision to lower interest rates was concerns related to increased risks of appreciation of the national currency.
Currently, the central banks of other countries, despite various kinds of fears and commitment to extreme caution, are nonetheless preparing to ease monetary policy. Markets and experts expect that relevant decisions will be made in the United States and the EU in June. Officials of financial regulators do not signal or show even minimal hints that monetary policy will be eased before the beginning of summer.
The national currency of Switzerland currently shows one of the worst indicators among the currencies of the Group of 10. The corresponding dynamic has formed and become a stable tendency amid speculation related to expectations that the SNB may be one of the first financial regulators to ease monetary policy. These assumptions, which were confirmed by reality, were related to expectations of the central bank’s actions to slow the franc’s growth.
In December last year, the SNB officially announced the likelihood of intervention in the foreign exchange market to weaken the national currency, the rate of which reached its highest level since 2015.
George Moran, European economist at Nomura International Plc, says that the Swiss central bank seems to have decided to use interest rate changes as a tool for regulating inflation. This means that the financial regulator has abandoned the mechanism of currency intervention. At the same time, so far there have been no official statements that the SNB is not considering the possibility of such actions, even at the level of assumptions about possible measures to respond to processes in the economic environment.
The Swiss central bank also lowered its inflation forecast. According to George Moran, this means a fundamental reassessment of the dynamic of the process of increasing the cost of goods and services.
The decision of the SNB came as a surprise, but nonetheless, some financial institutions were preparing for such a move. Barclays Plc and Citigroup Inc. were among those organizations that were highly likely to assess the prospect of an interest rate cut in March. CFTC positioning data shows that leveraged funds, including hedge funds, boosted their bets on the weakening of the franc last week. The corresponding rates have reached a maximum for the year.
The SNB does not belong to the category of those financial regulators who fear that their actions will become a shock factor for investors. The decision to lower the interest rate is an additional confirmation of the corresponding operating concept of the Swiss central bank. Previous examples of such a strategy by the SNB are related to the abandonment of the franc cap in 2015 and an unexpected increase in the cost of borrowing by 50 basis points in 2022.
It is worth noting that before the interest rate cut, the Swiss central bank was in a kind of total silence. The financial regulator did not signal in any format about the likely prospects for a change in monetary policy. Against this background, what can be called an information vacuum has formed, which has been filled with various speculative opinions about the dynamic interest rate. It is worth noting that some assumptions turned out to be correct. At the same time, this example should not be taken as an absolute and in all cases relevant confirmation that insider information and unofficial opinions about possible future options are guaranteed to be reliable.
Economists at Barclays Plc, Citigroup Inc., and Julius Baer & Co Ltd. were among the minority of experts who predicted that SNB officials would decide to ease monetary policy in spring.
In early March, the Swiss central bank was most often mentioned in the information space in the context of Thomas Jordan’s statement of his intention to resign in 2024. Against this background, what is commonly called the succession race began. If this process follows the historical patterns of the relevant practice, SNB Vice President Martin Schlegel is highly likely not to head a financial institution.
The interest rate cut followed the Fed’s statement about continued to be actual forecast, according to which there will be at least three lowering of the mentioned indicator in the United States this year. The central bank of Norway this week kept the cost of borrowing on hold. The Bank of England is expected to make a similar decision shortly.
In Switzerland, inflation turned out to be less stable and strong compared to preliminary expectations regarding the dynamic of this process. The sustainable growth of the franc has become an argument in favor of the fact that the increase in the cost of goods and services will gradually weaken. The SNB predicts that inflation will be 1.4% this year. The financial regulator also expects that the specified indicator will be fixed at 1.2% next year. In 2026, according to the forecasts of the SNB, inflation will be 1.1%.
Thomas Jordan says that for several months the mentioned indicator has been below 2% and is in a range that corresponds to the concept of price stability. According to him, inflation will continue to remain in the appropriate range over the next few years.
Thomas Jordan also stated that the SNB is ready to be active in the foreign exchange market if necessary. According to him, this means that the financial regulator may at some point decide both on the buy and sale of foreign currency. In this context, Thomas Jordan separately noted that the size of the SNB’s balance sheet has no impact on monetary policy decisions.
After years of fighting the haven currency’s strength, the Swiss central bank changed its tactics, focusing on containing import inflation. The financial regulator supported the franc by buying the national currency until the last quarter of 2023.
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