SNB Surprises With Half Point Rate Cut to Stem Gains in Franc

(Bloomberg) — The Swiss National Bank delivered a bigger-than-expected 50 basis-point interest-rate cut as it sought to head off gains in its currency.

Officials lowered their key benchmark to 0.5% on Thursday, a step predicted by only a small minority of economists surveyed by Bloomberg. Most anticipated a quarter-point move.

The Swiss franc fell against the euro in response dropping as much as 0.7% to 0.9344 per euro, the lowest since November, and traded down 0.4% as of 12:35 p.m. in London.

“To wait on cuts doesn’t make any sense,” SNB President Martin Schlegel told Bloomberg Television, explaining the size of the move. “This would mean that we have a monetary policy that is too restrictive for the moment.”

The central bank’s biggest reduction in almost 10 years is a statement of intent from Schlegel at his first decision as president. With wars in Ukraine and the Middle East and Donald Trump set to return to the White House, he’s looking to deter traders who have plowed money into the franc in recognition of its traditional role as a haven at times of geopolitical stress. 

While the half-point move weakens the currency’s appeal to speculators, it also uses up precious ammunition. Borrowing costs are now only two quarter-point steps away from zero. After that point, officials would need to choose between market interventions to currency gains or else going negative — options which each come at a cost.

Asked about the depth of his policy arsenal, Schlegel told reporters that policymakers “still have ammunition left.” He also said that Thursday’s decision made a return to sub-zero interest rates less likely.

“Nobody likes negative interest rates,” Schlegel said in his Bloomberg interview. 

“Of course we would also be ready to implement negative interest rates again if necessary,” he added. “But with the cut that we did today, the probability of negative interest rates has been lowered.”

The SNB also tweaked its language on future shifts in policy. Having said in September that “further cuts” in the rate “may become necessary,” officials now instead say that the central bank may “adjust its monetary policy if necessary.” Similar changes in wording are not unusual in such statements.

Having brought down borrowing costs at all four meetings of 2024 to one of the world’s lowest levels, the central bank’s rate is already back at the point it reached in September 2022, when it ended almost eight years of subzero monetary policy. 

“Inflation risks are on the downside and the economy is growing below potential while Switzerland’s main export are struggling with structural and cyclical problems,” said Karsten Junius, chief economist at Bank J. Safra Sarasin in Zurich, who predicted the move and sees two further quarter-point cuts in the first half of next year. “Schlegel clearly signals that he is as determined to fight too low inflation as his predecessor.”

Officials are trying to stop inflation from undershooting the floor of their 0-2% target range. The franc last month touched the highest level against the euro in almost a decade, eroding Swiss consumer-price pressures by making imports cheaper. 

What Bloomberg Economics Says…

“This jumbo cut substantially reduces the policy space available to the SNB. We still expect further easing will be needed as other central banks continue to reduce rates. We expect the SNB to deliver another cut in March, taking the rate to 0.25%. That might be the last cut for this cycle, but risks are skewed toward further easing.”

—Maeva Cousin, senior economist. For full react, click here

Next year, reductions of electricity prices and rents are set to further push down inflation. Officials on Thursday delivered yet another downgrade to their forecast for consumer-price growth. It’s now expected to come in at 0.3% in 2025, down from a previous estimate of 0.6%.

Schlegel told reporters that while individual months in 2025 might see negative inflation rates, any such move should be temporary.

“After today’s decision it’s hard to argue for a stronger franc,” said Jordan Rochester, head of head of macro strategy at Mizuho. “From here the SNB are running out of room for conventional easing and a ramp up of FX sales will be needed in 2025 to offset the 0.3% inflation they expect for 2025 and 0.8% for 2026.”

The decision precedes that of the European Central Bank’s later on Thursday. Policymakers there are expected to cut rates by a quarter point. Meeting only every three months, the bigger step by the SNB may help policymakers avoid being outpaced by their peers in Frankfurt.

–With assistance from James Regan, Alexander Weber, Phil Serafino, Aline Oyamada, Naomi Tajitsu, Harumi Ichikura, Kristian Siedenburg, Joel Rinneby and Jana Randow.

(Updates with Schlegel comment in fourth paragraph)

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