THE Swiss National Bank cut its main interest rate by 25 basis points to 1.5 per cent on Thursday (Mar 21), a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation.
The central bank, in the first decision since long-serving chairman Thomas Jordan said he would step down in September, also reduced its interest rate on sight deposits to 1.5 per cent.
The move caught markets by surprise, sending the Swiss franc sharply lower against the US dollar and to an eight-month low agaist the euro.
A majority of analysts polled by Reuters had expected the SNB to keep rates on hold at 1.75 per cent. It was also the first rate cut by the SNB in nine years.
The easing comes after Swiss inflation dipped to 1.2 per cent in February, the ninth month in succession that price rises have been within the SNB’s 0-to-2 per cent target range, which it defines as price stability.
“The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective,” the SNB said in a statement.
The bank said that for some months, inflation had been back below 2 per cent and thus in the range it equates with price stability. According to the latest forecast, inflation is also likely to remain in this range over the next few years, it added.
The SNB said it was taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year.
“The policy rate cut also supports economic activity,” it said.
The SNB’s decision was the first in a busy day for central banks in Europe, with the Bank of England and Norwegian central bank also due to announce their latest policy moves.
Economists expect no change from the Bank of England or from the Norges Bank.
The European Central Bank is expected to make its first reduction in borrowing costs in June after it kept its interest rate on hold earlier this month.
The US Federal Reserve on Wednesday left its benchmark interest rate unchanged but retained its outlook for three cuts in borrowing costs this year.
Economists said the SNB’s rate cut was a bold move given the central bank’s usual caution.
“The SNB’s decision is a surprise, but was always a possibility because of the low inflation in Switzerland,” said UBS economist Alessandro Bee.
“It’s a brave move to go before the ECB and Fed, although the SNB will not see it that way, and they probably believe the other central banks will also cut rates later this year.” REUTERS
