SNB Expected to Cut Rates by 25 Basis Points

The Swiss National Bank (SNB) is poised to reduce its key policy rate by 25 basis points on December 12, according to a poll. This anticipated move is seen as part of the SNB's strategy to address weak inflation and manage the Swiss franc's strength.

Financial markets are, however, entertaining the possibility of a larger cut of 50 basis points. This expectation stems from Switzerland's current inflation environment, which is notably weak, as well as the SNB's concerns regarding the Swiss franc's appreciation. Since September, the franc has appreciated by approximately 2% against the euro. As of November 2023, Switzerland's inflation rate remains the lowest among major economies, holding at 0.7%. This figure is well below the SNB's target range of 0-2%, compelling the bank to consider policy adjustments to maintain economic stability.

Looking ahead, many economists believe that the SNB's rates could descend to near-zero levels by 2025. Currently, Switzerland's interest rate policy is one of the most conservative globally, second only to Japan, which stands at 0.25%. More than half of the surveyed economists predict that the SNB's rate could fall to 0.25% or even zero within the next year, highlighting the bank's cautious approach compared to other global economies.

Despite the prevailing sentiment, given the resilient Swiss economy and stable exchange rate, a 25 basis point cut might still surprise the market. The SNB's approach in recent times has been notably modest, transitioning from a deeply negative rate to the current level of 1.75%.

Because of the anticipated rate cut, the Swiss franc is expected to weaken slightly, although it might not fully relinquish the gains acquired in recent times. The ongoing economic dynamics also hint at a possible downgrade in the SNB’s short-term economic forecasts, yet with a sustained dovish guidance on future actions.

As the December 12 meeting approaches, all eyes are on the SNB’s decision, which could set the tone for Swiss monetary policy in the near future. The potential impact on the economy, particularly in relation to euro area trade dynamics and domestic inflation pressures, will be essential considerations for policymakers. As it stands, Switzerland remains cautious in its monetary policy adjustments, with careful consideration of both domestic economic indicators and international financial developments.