Swiss National Bank (SNB) Set for Potential Rate Cut

The Swiss National Bank (SNB) is expected to reduce its benchmark interest rate by 25 basis points in its upcoming meeting, marking the third consecutive cut. This decision aligns with Switzerland's updated economic forecasts, including lowered inflation predictions and a modest economic growth outlook. The strong Swiss franc, which has reached its highest value in nearly a decade, is also influencing the central bank's monetary policy decisions.

SNB's Interest Rate Strategy

The SNB has been more conservative in adjusting interest rates compared to other major central banks following the pandemic. While many of its peers aggressively raised rates, the SNB took a more measured approach, initiating rate cuts later. This Thursday 26th September, the central bank is expected to cut rates by another 25 basis points, following the trend of its recent meetings.

This anticipated rate cut comes as a slight majority of economists, surveyed by Reuters, predict the SNB will maintain its rates in December.

Lower Inflation Forecasts and Economic Projections

Switzerland's government has revised its inflation forecasts downward for 2024 and 2025. The new projections are 1.2% for 2024 and 0.7% for 2025, compared to the previous estimates of 1.4% and 1.1%, respectively. These adjustments are consistent with the expectations that the SNB will continue to ease its monetary policy.

In addition to inflation, Switzerland's economic growth projections have been slightly curtailed. The government now anticipates the economy to expand by 1.2% in 2024 and 1.6% in 2025, which is marginally lower than the earlier forecasts. This growth outlook underscores the challenges facing the Swiss economy, particularly in the export sector, which has been affected by the strong Swiss franc.

The Impact of a Strong Swiss Franc

The Swiss franc's strength, reaching its highest level in almost ten years, is a critical factor in the SNB's decision-making process. A stronger franc makes Swiss exports more expensive and less competitive in the global market, putting pressure on the country's export-driven sectors. This currency dynamic has fueled speculations that the SNB might opt for a more significant rate cut to mitigate the adverse effects.

Strategists from leading financial institutions such as MUFG, UBS, and BofA have suggested that a half-point interest rate reduction might be necessary for the SNB. Current market pricing indicates a roughly one-in-three chance of a half-point rate cut, an increase from the zero probability seen just a month ago.

According to data from Trading Central on our economic calendar, for historical events

• The price change on the USDCHF for the past 3 events ended bullish 67% of the time, over a 4 hour period after the announcement.
• The average price range for the USDCHF over a 4 hour period after the announcement was about 74 pips.

Anticipating the SNB's Next Move

The SNB's upcoming policy decision will follow closely on the heels of the Federal Reserve's September meeting. This timing adds another layer of complexity, as global economic conditions and monetary policies will influence the SNB's strategy. The central bank's approach will be closely watched, not only for its immediate impact on Switzerland's economy but also for the broader implications on global financial markets.

As the central bank prepares for a potential rate cut, the financial community is keenly observing its moves, anticipating how these decisions will shape Switzerland's economic future. Whether the SNB opts for a modest 25 basis-point cut or a more assertive half-point reduction, its policies will be pivotal in steering the country through these challenging times.

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