The Swiss central bank reduces interest rates by a quarter point for the third time this year.

• On Thursday, the Swiss National Bank decreased its key interest rate by 25 basis points to 1.0%, marking its third step to ease monetary policy this year.
• Amid subdued domestic inflation and a rally in the Swiss franc, the reduction comes.
• In March, the first major Western central bank lowered its interest rates.

On Thursday, the Swiss National Bank decreased its key interest rate by 25 basis points to 1.0%, marking its third step to ease monetary policy this year.

The SNB's third interest rate reduction of 2024 was anticipated by 30 of 32 analysts surveyed in a Reuters poll.

In March, the first major Western central bank lowered its interest rates.

The Swiss National Bank has announced a 50-basis-point cut in interest rates, following in the footsteps of the European Central Bank and the U.S. Federal Reserve. Despite this, Swiss inflation remains low, with the latest headline print showing an annual increase of 1.1% in August.

In an interview with CNBC's Silvia Amaro on Thursday, SNB Chairman Thomas Jordan, who is stepping down from the central bank at the end of this month, acknowledged that "additional rate cuts may be required to maintain price stability within the next three months," but declined to specify the number of such policy interventions that would be necessary.

He remarked that the new inflation forecast in December would reveal the direction for monetary policy adjustments.

The bank revised its inflation forecast "significantly lower" than its previous predictions, citing the strength of the local currency, a weaker oil price, and electricity price cuts announced for next January.

The revised forecast predicts an average annual inflation rate of 1.2% for 2024, 0.6% for 2025, and 0.7% for 2026, which is lower than the previously estimated 1.3%, 1.1%, and 1.0% for the same periods.

Swiss strength

The Swiss franc strengthened against major currencies after the latest interest rate decision, with the U.S. dollar and euro losing nearly 0.14% and 0.16% against the Swiss coin, respectively, as predicted by ING analysts.

In August, the strengthening of the Swiss currency prompted Swissmem, one of the country's largest technology manufacturers' groups, to urge the SNB to "act quickly in accordance with its mandate" and ease the pressures affecting local businesses.

The renewed exacerbation has come at a sensitive time for one of the key export industries. Following a tough period of over a year, a slow recovery was in sight. If the upside pressure cannot be contained, these hopes will dissipate, Swissmem said at the time.

The reduction on Thursday was attributed to the SNB's currency rally being a significant factor.

The Swiss franc has appreciated over the last three months, resulting in a significant decrease in inflationary pressure in Switzerland compared to the previous quarter.

The SNB's monetary policy easing today accounts for the reduction in inflationary pressure. The bank may need to make further cuts in its policy rate in the coming quarters to maintain price stability over the medium term.

Deflation

Some analysts have raised questions about whether Switzerland is facing deflation, a rare condition among major Western economies that have mostly experienced rapid price increases since the Covid-19 pandemic.

Despite consistently forecasting lower inflation rates, the SNB has been behind the curve on its inflation predictions this year. The 0.6% forecast for 2025 may be too close for comfort for a central bank aiming to return to deflation, according to Kyle Chapman, FX markets analyst at Ballinger Group.

Chapman stated that he anticipates at least two 25bp moves in December and March due to the lack of near-term depreciation sources for the franc without SNB intervention. He added that the franc is heading back towards zero at a rapid pace.

Jordan talked down this risk on Thursday.

Jordan stated to reporters, as reported by Reuters, that the inflation forecast is still within the price stability range, so there is no risk of deflation in the near future. However, he noted that the central bank may need to lower interest rates again to maintain inflation within the 0-2% target range.

The SNB communique implies that the central bank's policymakers may soon resort to forex interventions, although they have not used them to a significant extent.

According to Prettejohn, once the policy rate falls to around 0.5%, the SNB will start to consider using FX interventions significantly. At that point, it will be a more finely balanced decision as to how much to rely on currency intervention rather than further rate cuts to provide further monetary policy support.

Jordan stated that they have the option to use the foreign exchange intervention tool if needed and will do so when they believe it will positively affect monetary conditions, as conveyed to CNBC's Amaro.