
Swiss National Bank Set to Cut Interest Rates Again: What to Expect in September
September 23, 2024Why the SNB Is Cutting Rates Again
Swiss inflation has fallen to 1.1%—the lowest among the G10 economies and well within the SNB’s target range of 0-2%. This low inflation rate has allowed the central bank to pursue a more gradual approach to rate cuts, starting in March, well ahead of other central banks. However, the Swiss franc has strengthened significantly, gaining over 5% against the euro since May, prompting concerns about its impact on Swiss exports and industry.
According to Karsten Junius, chief economist at J. Safra Sarasin, “The SNB is almost certain to cut its policy rate by 25 basis points to 1.00% this coming Thursday. We are aware that the SNB is not afraid to front-load policy changes if deemed necessary, but we believe that a 50 basis-point cut in September would display unnecessary panic.”
Expectations for December: Will the SNB Hold or Cut Again?
While the rate cut this week seems almost certain, opinions are divided on what the SNB will do in December. According to the Reuters poll, about 55% of economists expect the central bank to hold rates steady at 1.00% in December. However, 16 economists predict the rate will remain at 1.00%, while 15 foresee a further reduction to 0.75%. Only one economist expects the rate to rise back to 1.25%.
The poll also suggests that the SNB will continue to lower rates into 2024, with a cut to 0.75% expected in March. Beyond that, no further changes are anticipated until at least 2026. If this forecast holds, the SNB will have reduced rates by a cumulative 75 basis points in 2023, matching the European Central Bank's (ECB) expected cuts for the year.
The Swiss Franc and its Impact on Monetary Policy
One of the key drivers behind the SNB's rate cuts is the ongoing strength of the Swiss franc. The currency has appreciated significantly in recent months, partly due to market expectations that the ECB will continue cutting rates. This has raised concerns among Swiss policymakers, particularly SNB Chairman Thomas Jordan, who recently pointed out that the franc’s strength was creating difficulties for Swiss industries that rely on exports.
Adrian Prettejohn, Europe economist at Capital Economics, notes, “Policymakers will be unhappy with the franc’s recent appreciation and will use rate cuts to try and stifle its ascent. Further ahead, if the franc continues to appreciate, the SNB may revert to using large FX interventions.”
However, there is a limit to how far the SNB is willing to cut rates. Prettejohn adds, “We think the SNB will not want to cut the policy rate much further, if at all, in response to a strong franc, as policymakers will want to reserve some space to loosen policy in case a domestic shock occurs in the future.”
What to Expect for Swiss Inflation in the Coming Years
Despite concerns about the franc’s strength, Swiss inflation remains well under control. Economists in the Reuters poll expect inflation to average 1.2% this year, before easing slightly to 1.0% in 2025. This forecast is slightly above the government’s latest projections, but still within manageable levels, giving the SNB flexibility to adjust its monetary policy as needed.
Conclusion: SNB's Strategy Amid a Strong Swiss Franc
The Swiss National Bank is poised to continue its gradual easing of monetary policy, with a 25 basis-point rate cut expected this week. While inflation remains low, the strong franc presents challenges for Swiss industry and exports. The SNB's careful balancing act—managing inflation while mitigating the franc’s rise—will likely continue into 2024, with additional rate cuts possible if the currency continues to appreciate. As policymakers navigate these economic dynamics, the Swiss economy’s resilience will depend on the SNB’s ability to adapt to both domestic and global pressures.