Swiss central bank opens door to more rate cuts

Marking the last meeting headed by Thomas Jordan, in September the Swiss National Bank ended one chapter while opening another to signal future easing. From fresh inflation forecasts to the strong franc, we delve into what’s in store for Swiss interest rates. 

Keep calm and carry on: the end of the Jordan era

The September meeting proved a fitting end to Thomas Jordan’s era heading up the Swiss National Bank (SNB), a period during which his calm, consistent and considered approach steered the bank’s policymaking. 

His style was reflected in the bank’s September rate reduction to 1%, the upper end of what we consider to be the neutral rate, or a level that is neither restrictive nor expansionary. His adherence to the SNB’s mandate to ensure price stability was unwavering and steadfast throughout his 12-year term. And, going forward, little stands in the way of constructive Swiss growth expectations in the medium term, further cementing Jordan’s positive legacy. 

That said, economic concerns also remain a constant for his successor, Martin Schlegel. Could the weakness of Switzerland’s export partners push the SNB to loosen policy again? And is the strong CHF still a cause for trepidation? 

The Swiss economy, it seems, is not entirely out of the woods yet. 

An open door to more easing

Ahead of the SNB decision, the 50bps rate reduction from the Federal Reserve at its September meeting had ramped up non-consensus market expectations for the SNB to follow suit. Instead, it delivered a 25bps decrease but left the door wide open to further easing by using more dovish language in the policy statement and unveiling much lower inflation projections.

The September statement stated: “Further cuts in the SNB policy rate may become necessary in the coming quarters to ensure price stability over the medium term.” This contrasted with June’s statement, where the SNB said it was monitoring inflation closely and would adjust policy only “if necessary”. 

The SNB’s conditional inflation forecasts have also fallen sharply, as shown in Figure 1. We believe this is a clear message from the bank that it is not finished cutting rates but will do so in an orderly way. Crucially, the latest forecasts are now fully aligned with those of the KOF Swiss Economic Institute, with both predicting 0.50% inflation by the end of 2025. Previously, the think-tank’s lower forecasts, which were released ahead of the SNB meeting, had been another factor prompting speculation the central bank would ease by 50bps. 

FIG. 1. SNB conditional inflation forecasts, September 2024¹

We expect the SNB to lower rates again in December. The projections for lower inflation send a clear message that it is not yet finished easing, while the dovish language signals the bank is poised to deliver more cuts. Beyond December, we expect external factors – namely the currency, developments in the eurozone economy and inflation – to set the tone for policy. 

Beyond December: francs and exports

The CHF is a crucial driver of SNB rates, given the country’s reliance on exports and its status as a safe-haven currency. The SNB’s latest messaging repeated it is “willing to be active in the foreign exchange market as necessary” and it expects “the growth-dampening effect of the [franc’s] recent appreciation should subside” gradually.

The economic situation in Switzerland’s largest trading partners – Germany and the eurozone – is also likely to guide future policy. For instance, we are cautious that potential weakness in the eurozone could prompt a possible growth shock externally and hit demand for Swiss exports. 

Soft data has included drops in German PMIs to precarious levels (see Figure 2). The falls could presage deteriorating conditions that reduce demand for Swiss exports.

FIG. 2. Flash composite PMI employment indices²

Two factors drive exports: the quantity of sales, which is sensitive to growth shocks; and the cost of the goods, where, for Switzerland, the exchange rate comes into play.  As a result, we believe the SNB needs to keep the CHF soft to offset potentially weaker growth from its neighbours.

We note that if eurozone growth deteriorates, there is the risk of the European Central Bank loosening monetary policy. Lower eurozone rates would strengthen the CHF relative to the EUR and would not be welcomed by SNB.

More cuts in store?

In the wording of its statement and in its inflation projections, the SNB has clearly put a December cut on the agenda. The September reduction was not a ‘one and done’ move but rather paves the way for further easing. Going forward, we expect the SNB to be guided by the franc, exports and eurozone growth. 

The era of Thomas Jordan’s chairmanship has ended with a seamless transition to Martin Schlegel. Still, there is no time for ceremony given the economic challenges ahead.