The headquarters of the Swiss National Bank, in Zurich, Switzerland, on March 21.Denis Balibouse/Reuters
The Swiss National Bank (SNB) cut its main interest rate by 25 basis points to 1.5 per cent on Thursday, a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation.
The central bank, in the first rate decision since long-serving Chairman Thomas Jordan said he would step down in September, also cut its interest rate on sight deposits to 1.5 per cent.
The SNB’s decision, its first rate cut in nine years, kicked off a busy day for central banks in Europe, with the Bank of England and Norwegian central bank also announcing their latest policy decisions. The Norges Bank kept its rates on hold and economists also expect no change from the Bank of England.
The SNB move wrong-footed markets, sending the Swiss franc to an eight-month low against the euro and Swiss government bond yields tumbling, while boosting Zurich-listed shares.
A majority of analysts polled by Reuters had expected the usually conservative SNB to keep rates on hold at 1.75 per cent and wait at least another three months before moving.
“SNB is the first central bank to declare victory over inflation,” said Karsten Junius, chief economist at J.Safra Sarasin, who had expected a rate cut.
The step follows a drop in Swiss inflation to 1.2 per cent in February, the ninth month in succession that price rises have been within the SNB’s 0-per-cent to 2-per-cent target range.
“The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective,” Mr. Jordan told reporters, noting how Swiss inflation has held below 2 per cent for several months.
“According to our new forecast, inflation is also likely to remain in this range over the next few years.”
The SNB said it was taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year. The cut would support economic activity, it added.
Before the decision, Swiss industry had urged the central bank to broaden its focus from fighting inflation to help them deal with the strong franc, which was eating into profits.
Philipp Burckhardt, fixed income strategist and portfolio manager at Lombard Odier IM, said Thursday’s move was a logical consequence of current conditions and signalled more cuts ahead.
“This is also an ideal farewell gift from Thomas Jordan, who can now clearly set the direction for his successor,” he said.
Asked what was it like for the SNB to go first with policy easing, Mr. Jordan said: “For us, it’s not a question of whether we’re the first or last, we make the decision at the moment when we’re convinced that it’s a good time to make that decision.”
He also rejected the notion the cut was a parting gift, and declined to be drawn into discussing whether there would be any further rate moves this year.
“We give no forward guidance regarding our future interest rate decisions, but it’s clear we will look at the inflation forecast in three months,” he told a news conference. “If necessary, we will adjust monetary policy at that time.”
The European Central Bank (ECB) is expected to make its first reduction in borrowing costs in June after it kept its interest rates on hold earlier this month.
The U.S. Federal Reserve on Wednesday left its benchmark interest rate unchanged but retained its outlook for three cuts this year.
Not all central banks are moving in the same direction.
On Tuesday, the Bank of Japan ended eight years of negative interest rates with its first interest-rate hike in 17 years and on Thursday, central banks in Taiwan and Turkey surprised markets by raising rates, citing inflation concerns.
Economists said the SNB’s rate cut was a bold move given the central bank’s usual caution.
“The SNB’s decision is a surprise, but was always a possibility because of the low inflation in Switzerland,” UBS economist Alessandro Bee said.
“It’s a brave move to go before the ECB and Fed, although the SNB will not see it that way, and they probably believe the other central banks will also cut rates later this year.”
In its updated economic projections, the SNB dialled down its inflation forecasts, expecting it to average 1.4 per cent in 2024, down from its December prediction for a rate of 1.9 per cent.
Inflation is expected to finish next year at 1.2 per cent, down from 1.6 per cent previously forecast.