SNB to cut rates by 25 bps in March; on hold thereafter

Reuters

SNB to cut rates by 25 bps in March; on hold thereafter

Dec 16, 2024 at 12:34 pm GMT

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reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/cb-polls?s=GCR01+30+9&st=Menu+G+C poll data

By Indradip Ghosh

BENGALURU, Dec 16 (Reuters) -The Swiss National Bank will trim its key policy rate by 25 basis points in March, following last week's surprising 50 bps cut, and then stay on the sidelines until at least 2026, according to a majority of economists polled by Reuters.

In an unexpected move, the SNB slashed its main interest rate by half a percentage point to more than a two-year low of 0.50% on Dec. 12. Only four of 31 economists in a Reuters survey taken before the meeting predicted that move.

That was the steepest drop since the central bank's emergency rate reduction in January 2015 when it suddenly quit its minimum exchange rate policy with the euro. The Swiss franc has lost nearly 1% against the euro since Thursday and hit a four-week low of 0.9386.

At last week's press conference, SNB's new chairman Martin Schlegel left the door open for further reductions next year, but said "the likelihood of negative rates has become smaller."

In tandem with the SNB, the European Central Bank lowered rates later on Thursday but by 25 bps, assuring further weakness in the franc.

"Given our inflation forecasts, and our forecasts for further monetary easing by the ECB - which will put further upward pressure on the franc, alongside upward pressure from safe haven demand given the recent surge in political uncertainty - we think more SNB easing is required, but only a touch," said Melanie Debono, senior European economist at Capital Economics.

Debono was one of the few who foresaw Thursday's move.

All but one of 24 economists predicted the SNB would cut by 25 bps in March to 0.25%. A near 60% majority, 14, forecast the rate at 0.25% by the end of 2025. Ten said the rate will be 0% next year.

If that forecast materializes, Switzerland will claim the title of holding the lowest rate among G10 economies as the Bank of Japan is expected to raise rates to at least 0.50% by the end of March.

Schlegel said the SNB was ready to intervene in foreign exchange markets if necessary, although interest rates remained its primary tool.

Even after the 50 bps move, it could be difficult for the SNB to curb the franc's strength, especially against the euro, as interest rate differentials are poised to narrow with the ECB predicted to deliver at least 100 bps reductions next year.

"If currency concerns (and implications for inflation) are what prompted the larger-than-expected move ... we doubt the SNB can be done here, given we think much more is yet to come from its big neighbour, the ECB," Bank of America economists said.

"We still argue the SNB will ultimately not have much choice but to revert to FX interventions as an additional policy tool, but it might on the way have to use up the rest of the interest rate space it has left."

Swiss inflation, which was 0.7% last month and has been within the SNB's 0-2% target range since May 2023, will average 0.3% next year, according to central bank projections. That was lower than the 0.6% estimated in September.

(Other stories from the Reuters global economic poll)

Reporting and polling by Indradip Ghosh
Editing by Tomasz Janowski

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