Swiss central bank becomes first major bank to cut rates as Fed and ECB edge closer to taking action

By Steve Goldstein

Switzerland is one of the few countries in the industrialized world with tepid inflation pressures

The global rate-cutting cycle was started on Thursday when the Swiss National Bank made a quarter-point reduction in rates that took markets by surprise.

The dollar surged against the Swiss franc after the SNB cut rates to 1.5%. The dollar (USDCHF) rose to 0.8987 francs, from 0.8868 francs on Wednesday.

"The SNB surprised us and markets by cutting its rates by 25 [basis points], making it the first major [developed market] central bank to lower rates," Nomura economists led by George Moran said. Nomura now forecasts a string of cuts to take rates down to 0.5% by March 2025.

Officials of other central banks, including Fed Chair Jerome Powell and European Central Bank President Christine Lagarde, said rate cuts could be coming in just a few months' time. Lagarde said a June cut was "likely," while Powell said the base case was that there would be three reductions this year, which markets interpret to mean that a June reduction is highly likely.

Some suggested the Bank of England could cut rates as early as May, after two voting members changed their minds on the need to hike, and as minutes suggested that the bank's policy would be restrictive even if reductions were made.

The Bank of Canada also is planning rate cuts.

That everyone is moving more or less together puts pressure on countries like Switzerland that want to protect their exporters.

"While it has now widened the rate differential to a new record, the SNB will struggle to 'outcut' its peers and therefore prevent upward pressure on the franc. It was important to move first, in our view, to signal determination," economists at Citi said.

The Swiss National Bank's decision to cut rates in March came after it lowered its inflation forecast. The SNB said inflation is well below target at 1.2% in February, and it forecast annual inflation of 1.4% in 2024, 1.2% in 2025 and 1.1% in 2026.

-Steve Goldstein

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03-21-24 1017ET

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