The Swiss National Bank makes a bold move by reducing its interest rates by 50 basis points in response to the strong Swiss franc.

• On Thursday, the Swiss National Bank reduced its key interest rate by 50 basis points, surpassing predictions of a smaller reduction while grappling with low inflation and a robust Swiss franc.
• A majority of economists surveyed by Reuters predicted that the bank would reduce interest rates by 0.25%.
• The bank released a revised inflation forecast that was lower than the previous one, due to lower-than-expected oil and food prices.

On Thursday, the Swiss National Bank reduced its key interest rate by 50 basis points, surpassing predictions of a smaller reduction while grappling with low inflation and a robust Swiss franc.

The bank's main rate was increased to 0.5% despite more than 85% of economists predicting a smaller, 25-basis-point cut.

In March, Switzerland became the first major economy to ease its monetary policy, with four reductions implemented this year in an effort to control the appreciation of the national currency and decrease in consumer prices.

"The SNB has eased its monetary policy in light of the decrease in underlying inflationary pressure this quarter, and will closely monitor the situation to ensure inflation remains within the range consistent with price stability over the medium term."

In an interview with CNBC's Carolin Roth on Thursday, Schlegel stated that the policy decision was due to lower-than-expected inflation levels and added that negative interest rates were now less likely with this cut.

The bank released a new conditional inflation forecast that was lower than the one from September, due to a "lower-than-expected" print for oil products and food, and predicting "little change in the medium term."

The SNB policy rate is expected to remain at 0.5% throughout the forecast period, with average annual inflation projected at 1.1% in 2024, 0.3% in 2025, and 0.8% in 2026.

'Nobody likes negative interest rates'

Policymakers are likely uncomfortable with the 0.3% conditional forecast for next year, given their recent history of downward revisions at every meeting this year. As a result, zero interest rates may be implemented as soon as June, and further cuts are expected, according to Kyle Chapman, FX markets analyst at Ballinger Group.

Schlegel emphasized that Switzerland can tolerate a brief period of inflation exceeding the SNB's price stability range of 0% to 2%, but stated that the institution aims to control consumer price growth within that range in the long run.

He did not rule out the use of negative interest rates to achieve that goal.

Negative interest rates are not well-liked, as nobody enjoys them. Although the SNB does not favor negative interest rates, it is possible that they may be reintroduced in the future if necessary.

He recognized that this step helped curb the allure of the Swiss franc during a seven-year period that ended in 2022. Additionally, Schlegel left the possibility open for the SNB to utilize its extensive reserves and engage in foreign exchange market intervention to control the national currency.

By 9:17 a.m. London time, the Swiss franc had fallen by 0.4% against the U.S. dollar, while the euro had risen by 0.57%.

As the ECB cuts rates faster than the SNB and uncertainty around a Trump presidency increases safe haven flows, the franc is likely to face more appreciative pressure, according to Ballinger's Chapman.

Schlegel emphasized the significance of foreign advancements on Swiss finances. In response to inquiries about the influence of President-elect Donald Trump's impending White House return in January, he stated, "As a small open economy, Switzerland values free trade and open borders."

Subdued inflation

In November, Swiss inflation was 0.7% year-on-year, higher than the 0.6% annual print in October. Despite political instability in the euro zone, the franc has remained stable due to its reputation as a safe haven. However, the SNB's rate cuts have put pressure on the franc, which has affected Swiss export opportunities. Weak demand and sales orders have already limited Swiss export prospects, and the franc's rally has further complicated the situation.

Since January 2021, the business climate index produced by Swissmechanic has been at its weakest level, with the industry association expecting further declines in orders, sales, and margins in the fourth quarter.

The Swissmem industry association reported in November that Switzerland's tech sectors are still experiencing a downturn, with key indicators suggesting no immediate recovery. To support the Swiss export economy, political efforts must be intensified to facilitate access to growing markets, specifically through free trade.

In the third quarter, the broader economy experienced "below-average growth" of 0.2%, which was lower than the 0.4% growth recorded in the previous three-month period, according to official figures released in November. This was due to the negative impact of the industrial sector.

The European Central Bank is predicted to reduce its rates by 25 basis points during a later meeting, while the market focus will shift to this event.