A picture taken on September 25, 2019 in Bern shows the building of the Swiss National Bank (SNB. BNS) the central bank of Switzerland. (Photo by FABRICE COFFRINI / AFP)
Switzerland’s central bank is expected to continue easing monetary policy on Thursday, September 26, with most economists forecasting a further cut of 0.25 percentage points in its key interest rate – if not more.
Following 0.25 percentage-point cuts in March and in June, the Swiss National Bank’s (SNB) policy rate currently stands at 1.25 percent.
The rates decision at the SNB’s meeting comes amid pressure from industry to rein in the rise of the Swiss franc.
Last week, the employers’ convention of the Swiss watch industry and the watchmaking federation urged the bank to take action to combat the high franc, which is putting pressure on a key sector already battling difficult circumstances with the drop in demand in China for luxury Swiss watches.
In August, Swissmem, the national association representing the engineering industry, also urged the SNB to intervene, warning that the franc’s surge against the euro since mid-July risked dampening hopes of a recovery in the export-dependent sector.
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Like gold, the Japanese yen or German bonds, the Swiss franc is one of the major havens in which investors take refuge in times of uncertainty.
The franc recovered against the euro from the end of May onwards, then accelerated significantly, approaching its peaks of late 2023 and early 2024.
Since mid-July, the euro has lost around 3 percent of its value against the Swiss franc.
Employers’ organisations say the SNB has room for manoeuvre given the fall in inflation, which has been below the SNB’s two-percent target since June 2023.
It fell back to 1.1 percent year-on-year in August.
Inflation was quickly brought under control in Switzerland, with the strong franc giving the SNB a boost as it helped ease the pressure on imported product prices, including oil products, which shot up after the Russian invasion of Ukraine in 2022.
Switzerland central bank under pressure
In March, the Swiss central bank cut interest rates for the first time since June 2022 – the first to do so among the major Western central banks, saying its fight against inflation was working.
That initial 0.25-percentage-point cut in its key rate was followed by a second cut of the same magnitude in June.
Economists expect a similar cut at the Swiss central bank’s September meeting.
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However, following the US Federal Reserve’s September 18 decision to cut rates by half a percentage point – or 50 basis points – some are wondering whether the SNB will do likewise.
Pictet Wealth Management senior economist Nadia Gharbi said she expected the SNB to cut its policy rate by 25 basis points to 1.0 percent, without ruling out a larger cut of 50 basis points.
While cuts of this magnitude are rare, market expectations and the ongoing reorientation of monetary policies are “putting pressure on the SNB to go further,” she said.
SNB chairman Thomas Jordan is due to leave his post at the end of September and hand over to his right-hand man Martin Schlegel.
Adrian Prettejohn, an economist at Capital Economics, said Jordan “will probably use his last meeting to once again surprise markets by cutting the policy rate by 50 basis points to 0.75 percent.”
While central banks usually prefer to cut interest rates in 25 basis point increments to minimise the risk of over-loosening, “we think a 50 basis point cut is more likely, as the franc appears to be much stronger than the SNB would like.”
“Policymakers will be unhappy with the franc’s recent appreciation and will use rate cuts to try and stifle its ascent,” he said.
Of the 18 economists surveyed by the Swiss financial newswire AWP, Prettejohn was the only one expecting such a sharp drop, with the others predicting a reduction of 0.25 percentage points.
During his 12 years at the helm, Jordan has managed numerous crises, including the economic shock of the Covid-19 pandemic in 2020 and the UBS takeover of the stricken bank Credit Suisse in 2023.