The Swiss central financial institution is slicing rates of interest by 1 / 4 level within the third curiosity interval this 12 months

A view of the headquarters of the Swiss National Bank (SNB) before a press conference in Zurich, Switzerland, March 21, 2024.

Denis Balibouse | Reuters

The Swiss National Bank on Thursday took a third step toward easing monetary policy this year, cutting its key interest rate by 25 basis points to 1.0%.

The rate cut, which was expected by 30 of 32 analysts polled in a Reuters poll, marked the SNB's third rate cut in 2024.

It was the first major Western central bank to cut interest rates back in March.

The third rate cut comes amid similar signals from the European Central Bank and the U.S. Federal Reserve, which last week made the long-awaited move and slashed their interest rates with a 50 basis point cut. Domestically, inflation remains subdued in Switzerland, with the latest headline pointing to an annual rise of 1.1% in August.

Speaking to CNBC's Silvia Amaro on Thursday, SNB chief Thomas Jordan, who is leaving the central bank at the end of this month, acknowledged that “further rate cuts may be necessary to stabilize inflation over the next three months within the framework of price stability.” “Months,” but declined to say how many such monetary easing measures would be necessary.

“In December, the new inflation forecast will tell us exactly in which direction monetary policy should be adjusted,” he noted.

The bank rated its inflation forecast as “significantly lower” than in June, citing local currency strength, weaker oil prices and electricity price cuts announced for next January.

The new outlook assumes average annual inflation of 1.2% for 2024, 0.6% for 2025 and 0.7% for 2026, compared to 1.3%, 1.1% and 1.0% the were outlined in June for the respective periods.

Swiss strength

The Swiss franc gained ground against major currencies due to the recent interest rate decision. The US dollar and euro lost nearly 0.14% and 0.16% respectively against the Swiss currency, meeting ING analysts' expectations that the cut would lead to “outperformance” of the Swiss currency.

The appreciation of the Swiss currency in August prompted one of the country's largest associations, technology manufacturing group Swissmem, to call on the SNB to “act soon in line with its mandate” and ease the pressure hampering local businesses.

“This renewed tightening comes at a sensitive time for one of the most important export industries: after a difficult phase of over a year, a slow recovery was in sight. If upward pressure cannot be contained, these hopes will fade,” Swissmem said at the time.

The SNB acknowledged the broader trend of its currency rally as a main factor behind Thursday's reduction.

“Inflationary pressure in Switzerland has once again decreased significantly compared to the previous quarter. This decline reflects, among other things, the appreciation of the Swiss franc over the last three months,” it said in a statement.

“Today's easing of monetary policy by the SNB takes into account the easing inflationary pressure. Further cuts in the SNB's key interest rates may be necessary in the coming quarters in order to ensure price stability in the medium term,” it said.

deflation

Some analysts have now questioned whether Switzerland is on the path to combating deflation – a rare disease among major Western economies that have been largely hit by meteoric price rises since the Covid-19 pandemic.

“The SNB has consistently lagged behind the curve with its inflation forecasts this year, even though it has made them dependent on lower interest rates each time. The 0.6% forecast for 2025 is probably a little too close for comfort for a central bank looking to return to “deflation,” said Kyle Chapman, foreign exchange market analyst at Ballinger Group.

“I expect at least two more steps of 25 basis points in December and March, especially because I do not see any sources of depreciation for the franc in the short term without a stronger stance towards SNB interventions. Relatively speaking, we're moving back toward zero quickly,” Chapman added.

Jordan downplayed that risk on Thursday.

“If you look at our inflation forecast, it's still within the price stability range, so I don't see any danger of deflation anytime soon,” Jordan told reporters, according to Reuters. He added that the central bank may still need to cut interest rates again to keep inflation within the 0-2% target range.

Adrian Prettejohn, European economist at Capital Economics, said the SNB communiqué suggests central bank policymakers are unlikely to have used foreign exchange interventions “to any significant extent” – but could resort to such measures soon.

“We expect that the SNB will begin to consider the use of foreign exchange interventions on a significant scale once the key interest rate falls to around 0.5%. At that point, there will be a more balanced decision about the extent to which it relies on foreign exchange intervention rather than providing further rate cuts or further monetary policy support,” Prettejohn said in a note.

“We are also very clear that we can use the foreign exchange intervention tool if necessary, and we will do that if we believe it is helpful to have an impact on monetary conditions,” Jordan told Amaro of CNBC.