In a decision that has stunned financial markets, the Swiss National Bank (SNB) has surprisingly cut interest rates, becoming the first major economy to ease monetary policy after a prolonged period of high global inflation.
A Surprise 0.25 Percentage Point Rate Cut
Defying economist expectations of holding rates steady at 1.75%, the SNB unexpectedly lowered its key policy rate by 0.25 percentage points to 1.5% on Thursday. Most central banks around the world have been raising rates to combat stubborn inflation.
Justifying the Move With Low Inflation Outlook
The SNB cited forecasts showing Swiss inflation is likely to remain below the 2% target for the foreseeable future as justification for cutting rates. February inflation data showed prices rising just 1.2% year-over-year, prompting downward revisions to the inflation outlook.
Lower Inflation Forecasts and Economic Projections
Along with the rate cut, the central bank slashed its inflation forecasts, now seeing average inflation of just 1.4% in 2024, 1.2% in 2025, and 1.1% in 2026. However, it expects only modest Swiss economic growth of around 1% GDP expansion this year.
Predictions of Further Easing to Come
Analysts at Capital Economics believe the SNB’s surprise move signals a broader dovish policy shift. They forecast the bank will cut rates twice more in 2023, eventually taking the policy rate down to 1% as inflation undershoots the new lower projections.
Acknowledging Global Risks and Domestic Vulnerabilities
While anticipating moderate global growth ahead, the SNB highlighted significant risks from geopolitical tensions that could derail the economic outlook. It also flagged lingering vulnerabilities in Switzerland’s mortgage and real estate markets despite recent cooling.
Bucking the Trend as First Mover on Easing
The SNB has made the historic move of becoming the first major central bank to cut interest rates as others continue tightening policy. Its decision signals a potential turning point and could foreshadow other institutions following suit if disinflationary forces persist globally. The world will be watching Switzerland’s next monetary moves closely.
