Switzerland makes surprise cut to interest rates

Stay informed with free updates

Simply sign up to the Currencies myFT Digest — delivered directly to your inbox.

The Swiss National Bank announced a surprise cut to interest rates on Thursday in a sign of policymakers’ confidence over falling inflation. 

The SNB reduced its headline rate by 25 basis points to 1.5 per cent, making it the first central bank of a major western industrialised country to do so in the current cycle, in which global inflation surged in the aftermath of the coronavirus pandemic.

Other rate-setters, such as the European Central Bank, are still fretful over persistent upward price pressures and have kept rates steady in recent decisions. 

Speaking on Wednesday, ECB president Christine Lagarde declined to commit to future cuts, warning that inflation in the eurozone would persist for the rest of the year.

The US Federal Reserve held rates steady on Wednesday but indicated significant cuts would come later this year.

The Swiss franc fell 1.2 per cent against the US dollar after the SNB’s decision.

Thomas Jordan, SNB chair, said: “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. For some months now, inflation has been back below 2 per cent and thus in the range the SNB equates with price stability.

“According to our new forecast, inflation is also likely to remain in this range over the next few years. With our decision, we are taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year.”

Jordan is due to leave the SNB in September after 12 years at its head. A successor has yet to be announced.

Swiss inflation fell to its lowest level in two-and-a-half years in February, at 1.2 per cent. The Swiss economy was largely spared the effects of steep price rises felt elsewhere in the developed world over the past two years. Inflation in the wealthy Alpine nation peaked in August 2022 at 3.5 per cent.

Economists had expected the SNB to hold rates steady on Thursday, though a minority had predicted a surprise cut, citing the bank’s history of making bold decisions.

A weakening franc this year led many to believe the SNB would hold off on cutting its base rate until the summer.

Citing nine consecutive months of inflation being on-target, analysts at Capital Economics said focus on the franc was overplayed, however.

“The SNB has spent most of the last 15 years worrying about the franc being overvalued and the franc is still very strong, even if it was down from the end of last year,” they noted, having predicted the quarter-point cut to rates.

“We forecast the SNB to cut rates at the September and December meetings taking the policy rate to 1 per cent, where we think it will remain throughout 2025 and 2026,” said Adrian Prettejohn, an economist at the research group.

Speaking in Bern at a press conference following the decision, Jordan cited concerns about Swiss economic growth playing a role in the decision to cut rates.

“The weak demand from abroad and the appreciation of the Swiss franc in real terms over the past year are having a dampening effect,” he said. The franc hit an all-time high against the euro in late December. Its strength constrains Switzerland’s manufacturing industry, making its products more costly for foreign consumers.

Additional reporting by Martin Arnold in Frankfurt