Switzerland Kickstarts Rate Cuts For Major Central Banks

The Swiss National Bank lowered interest rates on Thursday, becoming the first major central bank to do so after a prolonged series of hikes to combat rising inflation, with all eyes on whether the US Federal Reserve will follow suit.

The SNB decreased its interest rate by a quarter point to 1.5 percent in response to a Swiss tightening strategy that began in June 2022.

In a busy week for central banks, the Federal Reserve held US interest rates unchanged on Wednesday, but left the door open for three more rate cuts by the end of year.

The Bank of England and the Norwegian central bank kept their key interest rates constant on Thursday, but are expected to begin reducing later this year.

Central banks throughout the world have raised borrowing prices in recent years to contain inflation, which soared when economies emerged from Covid epidemic lockdowns and intensified after energy producer Russia attacked agricultural power Ukraine in early February 2022.

In Switzerland, SNB chief Thomas Jordan stated that the decision to cut now was not made to outperform other central banks, but because it was “the right time” for the country.

The action propelled the Swiss franc to multi-month lows against the dollar and the euro.

“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,” the SNB added in a statement.

“For some months now, inflation has been back below two percent and thus in the range the SNB equates with price stability.”

Uncertain global outlook

The Swiss central bank added that global economic growth was likely to remain moderate in the coming quarters, while inflation was likely to decline further.

Adrian Prettejohn, Europe economist at Capital Economics, said the research group expected the Swiss central bank to cut rates a further two times in 2024.

“We forecast the SNB to cut rates at the September and December meetings taking the policy rate to one percent, where we think it will remain throughout 2025 and 2026.”

The SNB warned that inflation could remain elevated for longer in some countries, while geopolitical tensions could increase.

“It therefore cannot be ruled out that global economic activity will be weaker than assumed,” the central bank said.

“Our forecast for Switzerland, as for the global economy, is subject to significant uncertainty. The main risk is weaker economic activity abroad.”

The Fed on Wednesday held US interest rates at a 23-year high.

It said the decision to hold its key lending rate between 5.25 percent and 5.50 percent lets policymakers “carefully assess incoming data, the evolving outlook and the balance of risks”.

Bank of England sits tight

The Bank of England maintained its main interest rate at a 16-year high of 5.25 percent, rejecting a drop as UK inflation remains significantly higher than the BoE’s target.

In the minutes of its most recent meeting, the BoE stated that “monetary policy will need to remain restrictive for sufficiently long to return inflation to the two-percent target sustainably”.

Official figures released this week indicated that UK annual inflation fell to 3.4 percent, the lowest level in nearly 2.5 years.

The Norwegian central bank left the interest rate unchanged at 4.5 percent.

Christine Lagarde, president of the European Central Bank, warned on Wednesday against the possibility of moving “too late” on interest rate cuts, repeating that the eurozone’s first decrease in borrowing costs will occur in June.

While other major central banks were considering cutbacks, the Bank of Japan this week ended its extensive monetary stimulus program, raising interest rates for the first time since 2007.

Its outlier policy of zero interest rates and extensive asset purchases was aimed at resuming economic development and price increases in Japan after “lost decades” of stagnation and deflation — the polar opposite of the recent situation experienced by most developed nations.

Turkey’s central bank also resumed its tightening cycle on Thursday, citing “the deterioration in the inflation outlook”.

The bank’s monetary policy committee voted to boost the policy rate to 50% from 45 percent. Turkey’s annual inflation rate rose to more than 67 percent in February.

Leave a Reply