Following its quarterly monetary policy assessment on Thursday, the Swiss National Bank (SNB) board members decided to cut the benchmark Sight Deposit Rate by 25 basis points (bps) from 1.75% to1.50%.
The rate decision came in as a surprise to the markets.
Summary of the SNB policy statement
Momentum on the mortgage and real estate markets has weakened noticeably in recent quarters. However, the vulnerabilities in these markets remain.
The weak demand from abroad and the appreciation of the Swissfranc in real terms over the past year are having a dampening effect.
In this environment, unemployment is likely to continue to rise gradually, and the utilization of production capacity is likely to decline somewhat further.
Banks’ sight deposits held at the SNB will be remunerated at the SNB policy rate up to a certain threshold, and at 1.0% above this threshold.
This scenario for the global economy is still subject to significant risks. Inflation could remain elevated for longer in some countries, necessitating a tighter monetary policy there than expected in the baseline scenario.
The SNB also remains willing to be active in the foreign exchange market as necessary.
The new conditional inflation forecast is significantly lower than that of December.
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.
In theshort term, this is above all due to the fact that price momentum in the case of some categoriesof goods has slowed more quickly than had been expected in December .
According to the new forecast, inflation is also likely to remain in this range over the next few years.
Global economic growth is likely to remain moderate in the coming quarters.
The weak demand from abroad and the appreciation of the swiss franc in real terms over the past year are having a dampening effect.
Inflation is currently being drivenabove all by higher prices for domestic services.
Our forecast for switzerland, as for the global economy, is subject to significant uncertainty.
Market reaction to the SNB interest rate decision
In a knee-jerk reaction to the unexpected SNB rate cut decision, the USD/CHF pair nearly 100 pips to 0.8975 before easing slightly to 0.8965, where it now wavers. The pair is up 0.95% on the day.
SNB FAQs
The Swiss National Bank (SNB) is the country’s central bank. As an independent central bank, its mandate is to ensure price stability in the medium and long term. To ensure price stability, the SNB aims to maintain appropriate monetary conditions, which are determined by the interest rate level and exchange rates. For the SNB, price stability means a rise in the Swiss Consumer Price Index (CPI) of less than 2% per year.
The Swiss National Bank (SNB) Governing Board decides the appropriate level of its policy rate according to its price stability objective. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame excessive price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.
Yes. The Swiss National Bank (SNB) has regularly intervened in the foreign exchange market in order to avoid the Swiss Franc (CHF) appreciating too much against other currencies. A strong CHF hurts the competitiveness of the country’s powerful export sector. Between 2011 and 2015, the SNB implemented a peg to the Euro to limit the CHF advance against it. The bank intervenes in the market using its hefty foreign exchange reserves, usually by buying foreign currencies such as the US Dollar or the Euro. During episodes of high inflation, particularly due to energy, the SNB refrains from intervening markets as a strong CHF makes energy imports cheaper, cushioning the price shock for Swiss households and businesses.
The SNB meets once a quarter – in March, June, September and December – to conduct its monetary policy assessment. Each of these assessments results in a monetary policy decision and the publication of a medium-term inflation forecast.
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