Switzerland makes surprise interest rate cut

The Swiss National Bank cut its main interest rate by 25 basis points to 1.50 per cent on Thursday, a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation.

The central bank, in the first rate decision since long-serving Chairman Thomas Jordan said he would step down in September, also cut its interest rate on sight deposits to 1.50 per cent.

The SNB's decision, its first rate cut in nine years, was the first in a busy day for central banks in Europe, with the Bank of England and Norwegian central bank also announcing their latest policy decisions. The Norges Bank kept its rates on hold and economists also expect no change from the Bank of England.

The SNB move caught markets by surprise, sending the Swiss franc to an eight-month low against the euro and Swiss government bond yields tumbling, while boosting Zurich-listed shares.

A majority of analysts polled by Reuters had expected the usually conservative SNB to keep rates on hold at 1.75 per cent and wait at least another three months before moving.

The step comes after Swiss inflation dipped to 1.2 per cent in February, the ninth month in succession that price rises have been within the SNB’s 0-2 per cent target range.

“The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective,” Jordan told reporters, noting how Swiss inflation has held below 2 per cent for several months.

“According to our new forecast, inflation is also likely to remain in this range over the next few years.”

The SNB said it was taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year. The cut would support economic activity, it added.

Philipp Burckhardt, Fixed Income Strategist and Portfolio Manager at Lombard Odier IM, said Thursday's move was a logical consequence of economic and market conditions and signalled more cuts ahead.

“This is also an ideal farewell gift from Thomas Jordan, who can now clearly set the direction for his successor,” he said.