The Swiss National Bank cut its key interest rate again, taking the edge off a franc that has been surging in response to European political uncertainty.
A second successive cut of 0.25 percentage point cut leaves the SNB’s policy rate at 1.25 percent and was expected by analysts. Even so, the franc fell nearly half a percent against the euro on Thursday as the SNB explicitly flagged the risks posed by the unwanted exchange rate strength.
“The recent appreciation is above all attributable to political uncertainties in Europe,” SNB Chair Thomas Jordan said in introductory remarks at a press conference after the decision. “This … is contributing to uncertainty about the development of inflation remaining elevated.”
The franc had fallen around 6 percent against the euro between the start of the year and the end of May, helped by the SNB’s first rate cut in March. That had made Switzerland the first advanced economy to cut rates since the post-pandemic surge in inflation.
HSBC analyst Chantana Sam noted that as recently as last month, Jordan had appeared more concerned about the franc weakening too fast. However, the franc has rebounded sharply since elections to the European Parliament less than two weeks ago, which triggered a snap election in France and also drastically weakened the position of the three-party federal government in Germany.
A higher franc depresses the price of key imports from the neighboring eurozone, putting downward pressure on prices overall and increasing strains on export-focused Swiss industry.
“In the end, the recent appreciation in the CHF tipped the balance toward another rate cut,” Sam said in a note to clients.
Bond markets across Europe have been unsettled by fears that the new French government may fail to put the country’s debt back on a downward trend. Investors have sought safety in a currency with less perceived political risk, as they did — in much more extreme fashion — a decade ago during the eurozone sovereign debt crisis.
Jordan said the SNB will “monitor the situation closely and use our monetary policy measures to ensure that inflation remains within the range consistent with price stability on a sustainable basis over the medium term.”
He also repeated the Bank’s regular warning that it remains “willing to be active in the foreign exchange market as necessary.”
While most economists had expected a rate cut, a sizeable minority had expected the SNB to pause after recent data pointed to an economic rebound, while annual inflation had stuck at 1.4 percent. But the SNB shaved its forecasts for this year and the following two years on Thursday by 0.1 percentage point and now sees inflation falling to around 1 percent, the mid-point of its 0-2 percent target range, by 2026. It left its growth forecast for the current year at 1 percent, picking up to 1.5 percent in 2025.
The SNB noted that so-called “second-round effects” had been lower than it expected. “Underlying inflationary pressure has decreased again compared to the previous quarter,” the SNB said in its policy statement.
That’s a contrast in tone with the European Central Bank, which has repeatedly signaled doubt that underlying inflation is under control.
Elsewhere in Europe on Thursday, the Norwegian central bank kept its key rate at 4.5 percent and signaled it would stay there until year-end “before gradually being reduced,” according to Governor Ida Wolden Bache’s policy statement.