The Swiss National Bank (SNB) is reducing the key interest rate to 1.5 percent. The SNB key interest rate will be reduced by 0.25 percentage points, the central bank announced. With the reduction in the key interest rate, the SNB is the first major central bank to scale back its tight monetary policy to curb inflation .In advance, analysts had expected the SNB key interest rate to remain the same.
“The easing of monetary policy was possible because the fight against inflation was effective over the last two and a half years,” wrote the SNB in a media release. Inflation has been below the SNB target of 2 percent for several months now. The interest rate cut also supports economic development.
The SNB will continue to closely monitor the development of inflation, it was said. It will adjust its monetary policy again “if necessary” in order to ensure price stability in the medium term. And the SNB is still prepared to be active in the foreign exchange market if necessary.
Lower inflation forecast
In its latest forecast, the SNB assumes that inflation will average 1.4 percent in 2024. And only values of 1.2 and 1.1 percent are expected for 2025 and 2026. A value of over 2 percent is not forecast for any quarter in the forecast period.
The SNB has thus significantly lowered its forecasts compared to its last assessment in December. At that time, with a key interest rate of 1.75 percent, she had predicted annual average values of 2.2 percent for 2024 and 1.9 percent for 2025.
Fewer second-round effects
In the short term, the downward revision is primarily due to the fact that price dynamics for some product groups have cooled down more quickly than expected in December. In the medium term there were smaller second-round effects.
The SNB’s forecasts are always based on the assumption that the SNB key interest rate will remain at the current interest rate level over the entire forecast period. Relatively low inflation forecasts therefore increase the scope for monetary authorities to reduce interest rates. According to economists, further interest rate cuts can be expected in the near future.
SNB is slightly more optimistic about GDP growth
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The SNB has become slightly more optimistic about economic growth for the current year. It now forecasts gross domestic product (GDP) growth of around 1 percent (previously: “between 0.5-1.0%)”.
However, the monetary authorities emphasized that weak demand from abroad and the real appreciation of the franc last year were having a dampening effect. In addition, the forecast is subject to significant uncertainty, according to the SNB. The main risk is weaker economic development abroad. It cannot be ruled out that the global economy will develop weaker than expected.
As usual, the SNB also commented on the mortgage and real estate markets. The momentum has noticeably decreased over the last few quarters. However, the vulnerability of these markets still exists.
Before the SNB interest rate cut, the US Federal Reserve had stuck to its course the day before: It left the key interest rate in the range of 5.25 to 5.50 percent and at the same time signaled that it was likely to fall this year – by 0.75 percentage points. At the European Central Bank (ECB), which recently left its key interest rate unchanged, there are increasing signs of a turnaround in interest rates in June.