SNB Sticks With Steady Pace of Rate Cuts to Restrain the Franc

(Bloomberg) — The Swiss National Bank cut borrowing costs by a quarter point at a third straight meeting and warned of more to come if needed in its attempt to contain the strength of the franc.

Despite market speculation that officials in Zurich would follow the US Federal Reserve’s lead with a half-point reduction, they shirked from any acceleration in easing. The interest rate is now 1% after a 25 basis-point move on Thursday that was predicted by most economists surveyed by Bloomberg.

“With today’s easing of monetary policy, we are taking the reduction in inflationary pressure into account,” SNB President Thomas Jordan told reporters after his final monetary-policy decision. “Further cuts in the SNB policy rate may become necessary in the coming quarters to ensure price stability over the medium term.”

His incoming successor — Martin Schlegel — was even more explicit, telling Bloomberg Television in an interview that while the SNB doesn’t precommit, “we will have an assessment in December again, but from the current junction, it looks like — it is likely that — further cuts could follow.”

The outcome balances the SNB’s determination to rein in the currency, whose strength threatens to depress prices and hurt exporters, against its need to conserve ammunition. With one of the world’s lowest rates, the central bank has limited scope to keep reducing it in any extended confrontation with the foreign-exchange market. 

With a small minority of forecasters predicting either a half-point reduction or no change, the decision presented investors with a three-way cliffhanger. It was the final policy act overseen by Jordan, who surprised markets at pivotal moments in almost 13 years as SNB president.

“It would be hard to imagine a more characteristic end to the Thomas Jordan era at the SNB,” said Philipp Burckhardt, a fixed income strategist at Lombard Odier IM. “We now expect the SNB to follow up with at least one more interest rate cut in December. Against this backdrop, neither the current weakness of export partners nor a strengthening Swiss franc are helping.”

Market speculation for a larger cut had increased after the Fed’s action last week, and the currency touched a one-month low against the euro on the eve of the decision. 

The announcement initially boosted the franc, which rose as much as 0.3% to 0.9438 euros as some traders unwound bets on a bigger, 50 basis point cut, before paring gains back to 0.9454.

The franc’s rally to its strongest level in nearly a decade has caused a persistent headache for the SNB all year, raising the possibility that it could intervene to stem further gains.

What Bloomberg’s Economics Says…

“We expect the SNB to use some of the room that remains to deliver another cut in December, taking the rate to 0.75%. Such a move would be somewhat below its estimate of the neutral rate. The central bank will be reticent to cut much further, but it may feel it has to — it said further cuts might be necessary in the coming quarters.”

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The Swiss decision aligns with Europe’s less abrupt approach until now. Since the US move, the Bank of England vowed not to rush further easing, while Sweden’s Riksbank also stuck with a quarter-point pace even while warning that it could speed that up next time.

The SNB, which led peers with the first reduction in the current cycle in March, faces the challenge of consumer-price growth that is on a path to weaken further below the ceiling of its target band, toward zero. That would bring it perilously close to the disinflation that troubled Jordan and his colleagues for much of his tenure.

“For now, the SNB is likely to exhaust its remaining rate cut space before switching to FX interventions,” said Christian Schulz, an economist at Citigroup. “We still expect that the SNB will at some point have to switch to FX interventions to manage the exchange rate as it cannot ‘outcut’ other central banks and will have to accept shrinking interest rate differentials eventually.”

Officials lowered their forecasts for consumer-price growth, and now predict it will average 1.2% this year, 0.6% in 2025 and 0.7% in 2026. The central bank aims to keep it in a range between zero and 2%.

Policymakers know from experience that upward market pressure on the franc can be long-lasting, forcing them to respond judiciously. Having already bloated their balance sheet through years of interventions, rates have been their primary weapon in the past couple of years. 

Avoiding a bigger cut could expose the SNB to further criticism from exporters exposed to swings in the currency, not least because this was also Switzerland’s last scheduled decision before the US election, whose result could cause market tremors. 

While Swiss industrial activity is subdued, the services sector helped sustain stronger-than-expected growth in the second quarter.

The central bank sees growth at about 1% this year, before accelerating to around 1.5% in 2025.

“Growth is likely to remain rather modest in Switzerland in the coming quarters due to the recent appreciation of the Swiss franc and the moderate development of the global economy,” Jordan said.

The SNB chief’s final day in office will be on Monday. He will be succeeded by Schlegel, who has been his deputy for more than two years. The departure will remove one of the remaining veterans of the global financial crisis and its low-rate aftermath from the central banking stage.

Jordan said he’d always perceived his job as a “privilege” and thanked the Swiss population for its “great trust” in the institution — “this is absolutely decisive for the national bank.”

–With assistance from Alessandro Speciale, Alexander Weber, Paula Doenecke, Kristian Siedenburg, Joel Rinneby and Naomi Tajitsu.

(Updates with Schlegel in fourth paragraph.)

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