Swiss National Bank Poised for Further Rate Cuts Amid Low Inflation

Weak Inflation and Strong Swiss Franc Influence Rate Cuts

Swiss inflation demonstrated significant weakness in November, rising to just 0.7%—below the Federal Statistics Office's forecast of 0.8%. This lower-than-expected increase bolsters expectations for a more substantial rate cut by the SNB next week. Additionally, the Swiss franc has strengthened by approximately 2% against the euro since the September policy meeting, prompting the SNB to consider further rate reductions to prevent the currency from becoming overly strong.

Market Predictions for SNB's Monetary Policy

Financial markets are increasingly leaning towards a larger 50 basis points (bps) reduction, driven by persistent low inflation and the SNB's desire to counteract the franc's appreciation. Currently, the benchmark rate stands at 1%, after three successive 25 bps cuts in 2024. The Reuters poll indicates a 71% probability of a 50 bps cut and a 29% likelihood of a 25 bps reduction at the upcoming SNB meeting on December 12, shifting from previous market expectations of a modest cut.

Economists' Perspectives on Future Rate Reductions

Karsten Junius, chief economist at J. Safra Sarasin, highlighted that risks to price stability are diminishing, supporting his bank's forecast of a 50 bps rate cut in December, up from an earlier prediction of 25 bps. He further anticipates two additional 25 bps cuts in March and June 2025, potentially bringing the SNB benchmark rate to 0%. While negative interest rates remain a possibility, Junius describes this scenario as a high hurdle.

Christian Schulz, deputy chief European economist at Citi, cautioned that a 25 bps cut might come as a slightly hawkish surprise. However, he expressed skepticism about the feasibility of larger cuts, given Switzerland's resilient economy and stable exchange rate. Schulz also expects the SNB to maintain a dovish stance in its future guidance.

Impact of Low Inflation on Swiss Economy

Switzerland boasts the lowest inflation rate among major economies, with forecasts projecting an average inflation of just 0.7% in 2025 and 1.0% in 2026. The SNB's target range of 0-2% inflation has been effectively maintained, allowing for cautious monetary easing. Despite the economy's moderate expansion and the benchmark borrowing cost being at a meager 1.0%, the scope for significant rate reductions remains limited.

Swiss Franc's Role in Monetary Policy Decisions

The SNB's considerations for rate cuts are also influenced by the Swiss franc's strong performance. Although the currency is expected to weaken over time, its real-term appreciation has been limited. The central bank may resort to foreign exchange interventions to adjust the franc's value and prevent imported deflation. Currently, there is no clear and sizable overvaluation of the franc, easing some concerns about its impact on the economy.

Outlook for SNB's Policy in 2025

Looking ahead to 2025, the SNB is expected to continue its path of rate reductions, with economists predicting rates could approach near-zero levels. The interplay between low inflation and a strong franc will remain central to the SNB's monetary policy decisions, as the bank seeks to balance economic growth with price stability.

Conclusion

As Swiss inflation remains below expectations and the franc continues to strengthen, the Swiss National Bank is positioned to implement further interest rate cuts. With over 85% of economists anticipating a 25 bps reduction in December and some forecasting even larger cuts, the SNB's actions will be pivotal in shaping Switzerland's economic future. The central bank's ability to navigate these challenges will determine the trajectory of Switzerland's monetary policy in the coming years.