Swiss National Bank Cuts Rates: A Turning Point in Global Monetary Policy
Author: Agamjyot Singh Chadha, Research Executive
Editor: Tavisha Jain, Research Director
On March 21st the Swiss National Bank (SNB) surprised the market with an unexpected interest rate cut. As the first major central bank to reverse course, the SNB's decision raises questions about whether other central banks from advanced economies will follow suit. While declining inflation has eased some pressure, central banks face a complex balancing act of managing economic growth concerns, currency competitiveness all while tackling the issue of managing inflation. The SNB's might signal a potential shift toward looser monetary policies for the advanced economies.
The SNB's decision to cut its key interest rate by 25 basis point (0.25%) from 1.75% to 1.5% was primarily driven by a significant decline in Swiss inflation. After peaking in mid-2022, inflation has steadily fallen and is now comfortably within the SNB's target range of 0-2%. The Swiss inflation fell to 1.2% in February 2024. SNB has also revised their inflation forecast to 1.4% in 2024 down from the 1.9% estimate. This success in taming inflation allows the SNB to relax its monetary policy stance. Furthermore, the Swiss economy is facing a potential slowdown, with forecasts predicting modest growth in 2024. The rate cut aims to stimulate economic activity.
The SNB's rate cut had immediate effects on the Swiss franc with it losing 2% against the US dollar and 1% against the Euro. Raising interest rate generally strengthens the currency by making investments in the economy more attractive, lowering the interest rate weakens the currency. However, this might not be a bad thing for the Swiss industry, with them having urged the SNB to focus on tackling the issue of the Strong value of the Swiss franc. If the SNB's move sparks wider easing, it could provide a boost to economic growth beyond Switzerland, particularly in the struggling European economies. However, the impact is likely to be uneven. Swiss exporters stand to benefit from a weaker franc, while businesses focused on the domestic market might face increased competition from imports. Ultimately, the broader economic impact hinges on whether rate cuts can stimulate sufficient demand and the overall response of other central banks.
While most analysts view the SNB's move as a signal of a broader easing trend, there is debate about the extent and pace of potential rate cuts elsewhere. Some argue that declining inflation will pressure the European Central Bank and Bank of England (which just maintained its rate at 5.25%) to follow suit, while others expect more cautious cuts. The SNB's decision highlights how central banks might use rate cuts for economic stimulus. However, rising real interest rates, the strong U.S. dollar, and long-term inflationary pressures complicate the easing picture, suggesting that interest rates might ultimately settle higher than pre-pandemic levels.
The SNB's surprise interest rate cut marks a significant moment in global monetary policy, signalling a potential pivot away from relentless tightening. The decision highlights the role of central banks in balancing the ongoing fight against inflation, economic growth concerns, and the desire to maintain currency competitiveness. Other central banks will closely watch the economic and market reactions to Switzerland's move. The SNB's action raises the question of whether growth and exchange rate considerations will gain prominence, even if inflation remains above central bank targets.
Additional Readings
Michael, A. (2024, March 21). Interest Rates & Inflation: Bank Of England Follows US Fed With 5.25% Rate Hold. Forbes Advisor UK. https://www.forbes.com/uk/advisor/personal-finance/2024/03/21/inflation-rate-update/
Tejvan Pettinger. (2019, August 3). Effect of Lower Interest Rates | Economics Help. Economicshelp.org. https://www.economicshelp.org/blog/3417/interest-rates/effect-of-lower-interest-rates/
References
Barnes, A. (2024, March 21). Why the Swiss central bank made a surprise cut to its key interest. Euronews. https://www.euronews.com/business/2024/03/21/why-switzerlands-central-bank-made-a-surprise-cut-to-its-key-interest-rate
Hannon, P. (2024, March 22). Hannon’s Take: The Swiss Aside, Central Bankers Have Yet to Declare Victory. Wall Street Journal. https://www.wsj.com/articles/hannons-take-the-swiss-aside-central-bankers-have-yet-to-declare-victory-52078725
Iordache, R. (2024, March 21). Switzerland becomes first major economy to cut interest rates in surprise move. CNBC. https://www.cnbc.com/2024/03/21/switzerland-becomes-first-major-economy-to-cut-interest-rates-in-surprise-move.html
Revill, J. (2024, March 21). Swiss central bank cuts rates in surprise move, getting ahead of global peers. Reuters. https://www.reuters.com/markets/rates-bonds/swiss-national-bank-surprises-with-interest-rate-cut-2024-03-21/
Revill, J. (2021, March 18). Swiss industry leans on central bank to grant relief from strong franc. Nasdaq. https://www.nasdaq.com/articles/swiss-industry-leans-on-central-bank-to-grant-relief-from-strong-franc#:~:text=Swiss%20industry%20leans%20on%20central%20bank%20to%20grant%20relief%20from%20strong%20franc