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The Swiss National Bank cut interest rates to zero, but it wasn’t as far as negative interest rates as it fought to curb a surge in currencies due to global trade tensions.
The quarterly cuts by the central bank’s management committee on Thursday were predicted by economists.
This is the first time that an alpine country, one of the few worlds experimenting with negative interest rates, has slowed inflation and has reached zero interest rates as investors tackle the surge in Swiss franc, the shelter currency that they bought in the US President Donald Trump’s trade war.
The Swiss franc was strengthened after the expected cuts on Thursday, placing it flat on the day against the dollar, with the greenback being SFR 0.819.
The decision comes after an annual inflation immersed in May, which fell to minus 0.1 percent in May, the first negative read in four years. Evaluating the Swiss franc is increasing by 10% against the dollar this year, significantly reducing import costs and strengthening disinflation.
This year’s so-called sharp rise in Switzerland is complicated by complex policy making. The SNB is trying to ease the pressure without causing accusations of currency manipulation from the US, and Switzerland was placed on the watch list during Trump’s first term.
Analysts say interest rate cuts are a more diplomatically safer route than direct Forex intervention.
“The (central bank) expects global economic growth to weaken over the coming quarters,” SNB said in a statement with its decision on Thursday. “US inflation is likely to rise over the next quarter. In Europe, by contrast, we expect further declines in inflationary pressures.
“Inflation pressure has declined compared to the previous quarter. With today’s monetary policy easing, the SNB is fighting the decline in inflationary pressure,” he added.
Analysts at Capital Economics emphasized that the language of the statement on FX intervention has not changed and that they have not mentioned Fran’s strength. “This supports our view that SNB does not plan to use FX interventions as a key tool to ease monetary policy anytime soon,” they added.
Switzerland first introduced negative interest rates in December 2014. This has kept Fran’s gratitude in a safe at home flow with SNB setting its deposit rate at 0.25% negative.
Central banks at one stage fell to minus 0.75%, the lowest level in the world. The policy has been maintained for over seven years and until it ends in 2022 it became one of the world’s longest negative rate periods.
Thursday’s cut creates a potentially challenging situation for Swiss banks. They no longer have interest in reserves in SNB, but in theory there is less legitimacy to pass that cost to customers.
This is a developing story
