In a decisive move, the Swiss National Bank (SNB) reduced its key interest rate by 50 basis points on Thursday, surpassing market expectations of a smaller adjustment. The rate cut comes amid ongoing efforts to counter subdued inflation and manage the strength of the Swiss franc.
This change brings the central bank’s main policy rate to 0.5%. A recent survey of economists had overwhelmingly predicted a milder, 25-basis-point cut.
A Trailblazing Approach
Switzerland became the first major economy this year to adopt an accommodative stance on monetary policy, implementing four rate cuts in 2024. The move aims to address challenges posed by a strong national currency and declining consumer prices, which have dampened economic momentum.
Looking ahead, the SNB projects average annual inflation of 1.1% for 2024, 0.3% for 2025, and 0.8% for 2026, assuming the policy rate remains at 0.5% throughout the forecast horizon. Inflation in Switzerland has been consistently within the SNB’s target range of 0-2% since May 2023, with November's figure recorded at 0.7%.
Currency Impact and Market Reaction
Reacting the development, the U.S. dollar rose 0.4% against the Swiss franc, while the euro strengthened by 0.57%. Despite the series of rate cuts, the franc has maintained its position as a safe haven, particularly during political uncertainties in the eurozone.
However, the franc's strength continues to weigh on Swiss exports, which are already strained by sluggish global demand and declining sales orders.
Economic Performance and Business Sentiment
The Swiss economy faced a slowdown in the third quarter of 2024, with growth reported at a modest 0.2%, reflecting below-average performance. This marked a decline from the slightly stronger growth rate of 0.4% observed in the previous quarter, signaling a deceleration in economic activity. The subdued growth highlights challenges in maintaining momentum amid global economic uncertainties and domestic factors that may have contributed to the weaker performance. This slowdown is attributed to challenges in the industrial sector.
Adding to concerns, the business climate index from Swissmechanic, an industry association, fell in October to its lowest level since January 2021. The group highlighted expectations of further declines in orders, sales, and profit margins for the fourth quarter.
Spotlight on the ECB
Markets are also keenly watching the European Central Bank (ECB), which is widely anticipated to announce a 25-basis-point rate cut later in the day. This decision is expected to influence monetary policy trends across the region.