The Swiss National Bank (SNB) is expected to cut its key interest rate by 25 basis points (bps) to 1% this week. This rate cut could be the last for now, unless inflation falls significantly below the 1% mark and the growth outlook darkens.
The franc has recently appreciated further, supporting another rate cut. After the 50bp cut by the US Federal Reserve (Fed), there is even a probability of a 50bp cut by the SNB, driven by market expectations and the appreciation of the franc.
An uncertain trajectory
The path of the SNB rate beyond September is uncertain. Our baseline scenario assumes that the rate remains at 1.00% until 2025 (neutral rate). However, there is a risk that inflation could decline significantly more than the SNB itself expects. Moreover, recent economic growth has been below potential, with no signs of acceleration. Further rate cuts are possible if the inflation forecast for 2025 is revised downwards.
Industrial activity is expected to improve in the coming quarters, driven by foreign demand. However, if the slump in European industry persists, further easing may be necessary.
The franc in demand
Long-term Swiss franc bond yields suggest more SNB cuts than might be expected, indicating upside risk. The 10-year yield could rise to 0.7% in the coming months but is likely to fluctuate around the current level if further cuts occur.
Looking at the currency markets, the interest rate differential between the US dollar and the franc is expected to narrow significantly with the Fed’s rate-cutting cycle now starting. And with the franc expected to remain in demand due to numerous geopolitical crises, the USD/CHF exchange rate is expected to be at 0.80 by mid-2025.
The importance of EUR/CHF development
Investors should therefore use the countermovements of the USD/CHF towards the 0.88 region to reduce or hedge dollar holdings. More crucial for the Swiss economy and thus for the SNB will be the development of the EUR/CHF.
Although not as strong as in the dollar, the interest rate differential between investments in the euro and franc money market is expected to narrow due to further rate cuts by the European Central Bank.
EUR/CHF is therefore expected to move sideways around 0.93. The markets are aware that the SNB would react sensitively to stronger depreciations of the euro and could mainly use further rate cuts and, in addition, interventions on the foreign exchange market.
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