The Swiss National Bank on Thursday, March 20, decided to cut its key interest rate by a further 25 percentage points, as the country’s economy grapples with depressed inflation.
In the official statement of the mentioned financial institution, it was noted that the rate adjustment ensures the preservation of appropriate monetary conditions. In this context, it was also separately highlighted that the circumstances of the current state of affairs in the space of the Swiss economic system are low inflationary pressure and increased risks of lower inflation.
Moreover, in an official statement from the Swiss National Bank, it was noted that the financial regulator will continue to closely monitor the situation and make additional adjustments to monetary policy, if necessary. Nowadays, the financial institution is striving to ensure that inflation remains within a range consistent with price stability in the medium term.
The Swiss National Bank’s main rate is currently 0.25%. It is worth noting that this reduction in the cost of borrowing coincided with preliminary expectations regarding the decision of the financial regulator. Traders were pricing in an over 70% probability of a quarter-point reduction.
Swiss National Bank Chairman Martin Schlegel, commenting on Thursday’s decision, said it was necessary to act quickly rather than wait.
It is worth noting that sometimes insufficient speed of decisions and their implementation in the context of financial policy can eventually transform into the need to make more drastic and, to a certain extent, radical moves. At the same time, central banks are currently facing a high level of uncertainty related to the outbreak of a trade war amid tougher tariff measures from Washington and retaliatory actions from other world capitals. So far, there is no definitive understanding of what configuration of economic reality will be formed in a few months. Obviously, against this background, it is very difficult to determine which monetary policy strategy would be appropriate in the context of the global situation.
In December, the Swiss National Bank cut interest rates by 50 basis points. This scale of lowering the cost of borrowing exceeded preliminary expectations on the relevant occasion. Thursday’s decision marked the fourth interest rate cut since Switzerland became the first major economy in March last year to begin the process of consistent monetary policy easing.
Official data show that in February, inflation in the mentioned country fell to an almost four-year low of 0.3% on an annual basis. The Federal Statistics Office stated that cheaper imports were the main contributing factor to the mentioned dynamic of inflation.
On Thursday, the Swiss National Bank said that the inflationary process had developed as expected by the financial institution since its previous monetary policy assessment.
The financial regulator also noted that the new forecast for conditional inflation has hardly changed since December. In this context, the Swiss National Bank said that without Thursday’s decision to reduce the cost of borrowing, the projection would have been lower in the medium term. The financial regulator also noted that its inflation forecast is within the range of price stability in the medium term.
The Swiss National Bank expects that in the current year, inflation in the country will average 0.4%.
Stefan Gerlach, chief economist at EFG Bank, said that the financial regulator had been expecting inflation to ease to this level, saying that it’s sort of panning out the way the Swiss National Bank thought it would.
Against the background of Thursday’s decision, the Swiss franc weakened slightly. At the same time, the euro last up 0.06% against the franc. It is worth noting that the Swiss currency has the status of a safe haven during periods of political turbulence and high levels of uncertainty in the eurozone. Among the experts, quoted by the media, the prevailing view is that the franc will remain strong despite the Swiss National Bank’s decision to cut interest rates.
Responding to a question about the effects of the global tariffs of the United States President Donald Trump on the Swiss economy, Martin Schlegel emphasized the importance of the country’s export businesses. He noted that Switzerland is a small open economic system, a significant part of which is made up of exporters. According to him, this means that the country needs open borders and free trade, and the exchange rate is also important. The relevant formulations probably hint that for Bern, the outbreak of a trade war is an unfavorable form of global economic reality.
