The SNB kicks off the rate Cutting cycle
Thomas Jordan, Chair of the Swiss National Bank (SNB), has well and truly caught the media's attention so far this year. A few weeks ago, he announced that he would be stepping down at the end of September. And now he's back in the spotlight, having just announced a 25 bp rate cut, to 1.5%. This was no trivial decision. The SNB is again the first central bank to change its monetary policy – just like in 2022, when it became the first central bank in the developed world to announce a rate hike. There are likely to be more rate cuts in Switzerland this year. And today's announcement also paves the way for others to lower rates, starting with the US Federal Reserve (Fed) and the European Central Bank (ECB). These two central banks have also shown that they'll soon be ready to change their monetary policies. The statement from the Fed's meeting yesterday was clear: an initial US rate cut is likely to happen in June.
Turning back to the SNB, the rate cut was a response to the sharp drop in Swiss inflation. Annual inflation currently stands at 1.2%, which is well below the 3.5% peak it reached in August 2022. The SNB had feared that inflation would start creeping back up again this year as a result of the VAT hike and rising electricity prices and rents, but that hasn't happened. In fact, we've seen quite the opposite. It now looks like disinflation is here to stay, which is why Thomas Jordan and his colleagues decided that a restrictive monetary policy was not longer the right approach. Today's rate cut should provide a welcome breath of fresh air for the Swiss economy, particularly the export sector, which has been hit very hard by the strong Swiss franc and the sharp slowdown in the eurozone - Switzerland's biggest trading partner – and especially in Germany. Unsurprisingly, the Swiss franc dropped sharply against most currencies after the news broke this morning. This has reinforced the downward trend that the franc has been on since the start of the year. As a reminder, we think both the euro and the US dollar will pick up against the franc, and we recently increased exposure to the euro in our Swiss franc investment profiles.
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