Swiss National Bank Cuts Key Interest Rate to 1.5% Amid Low Inflation

The Swiss National Bank has made a surprising move by lowering its key interest rate to 1.5% in response to a dip in Swiss inflation to 1.2% in February. Stay informed with our latest analysis.

The Swiss National Bank (SNB) has made a surprising move by cutting its key interest rate to 1.5% in response to a decrease in Swiss inflation to 1.2% in February. This decision marks the first time a major western industrialized country's central bank has lowered its headline interest rate in the current cycle, with the US Federal Reserve and the European Central Bank (ECB) recently maintaining their interest rate pauses.

Led by outgoing chair Thomas Jordan, the SNB board of directors had previously raised the key interest rate in 2022 to combat rising inflation following the Covid-19 pandemic. However, with inflation in Switzerland steadily declining and reaching a low of 1.2% in February, the central bank deemed price stability to be no longer at risk even with the interest rate cut to 1.5%.

The latest forecast from the SNB predicts an average inflation rate of around 1.4% in 2024, with expectations of 1.2% and 1.1% for 2025 and 2026, respectively. The central bank attributes the effectiveness of its inflation-fighting efforts over the past two-and-a-half years to these projections.

The decision to lower the interest rate also takes into account the appreciation of the Swiss franc, which helps reduce imported inflation. Despite this, the SNB remains prepared to intervene in the foreign exchange market if necessary, as seen in its selling of foreign currencies worth almost CHF133 billion in 2023.

While the interest rate cut is expected to support economic development and slightly boost Swiss economic growth, the SNB warns of risks from weak global demand and the strong Swiss franc. Uncertainties in economic forecasts persist, with the main risk being the potential for higher inflation in some countries leading to tighter monetary policies than anticipated.

The SNB's decision to lower its key interest rate reflects its commitment to maintaining price stability and supporting economic growth amidst global economic challenges. The central bank remains vigilant in monitoring external risks and stands ready to take further action if needed.