Martin Schlegel starts with a bang. In the first interest rate decision under his presidency, he cut the key interest rate more than expected. It is by no means certain whether the strategy will work.
SNB President Martin Schlegel explains the interest rate decision in Bern.
Peter Schneider / KEYSTONE
It can happen that quickly. Just two years ago, the Swiss National Bank (SNB) was primarily concerned with increasing interest rates to push inflation, which was then too high, into the target range of 0 to 2 percent. Today the opposite concern dominates. Now that inflation has fallen again, there are fears that inflation will be too low – and thus a return to zero or even negative interest rates. To prevent this, the SNB reduced the key interest rate by a surprisingly high 0.5 percentage points to 0.5 percent.
Not a crisis situation
An interest rate cut was expected. The SNB had already indicated such a step three months ago – and confirmed its intention several times. However, most economists had only expected a reduction of 0.25 percentage points. Such a step length was the norm in the past. An interest rate cut of 50 basis points, on the other hand, was usually only carried out when the economy deteriorated very quickly and threatened price stability – for example due to a financial crisis, a recession or a significant overvaluation of the Swiss franc.
None of this can be observed at the moment: the financial markets are in a good mood. The Swiss economy is growing below average, but is far from a recession. Inflation – the most important indicator for the National Bank – is comfortably within the monetary policy target range at 0.7 percent. And the franc has strengthened in nominal terms, but adjusted for the lower inflation in Switzerland, the real exchange rate is surprisingly stable – even industry hardly complains about an overvalued franc anymore.
So why this bang? Why this urgency? It is to be feared that the impact of the significant interest rate cut will remain very limited. An investor who is looking for a safe haven for his money in these globally uncertain times will not be deterred by the franc due to slightly lower interest rates. Accordingly, the impact of the interest rate hike on the Swiss franc exchange rate is unlikely to be lasting. Experience shows that the devaluation aimed at with such easing quickly evaporates.
New leadership, new course?
Of course, good advice for what is currently cheap money is expensive. During his first assessment of the situation as SNB President, Martin Schlegel was faced with a difficult starting point: Inflation has recently fallen more sharply than forecast. Whether in oil, tourism, processed food or the second-round effects so feared by central banks: inflationary pressure is lower than expected everywhere. And in 2025, lower electricity prices and existing rents are likely to reinforce the trend.
But the SNB has a problem: there is not much room for maneuver in terms of interest rate policy to take countermeasures; interest rates are already dangerously close to zero. What should be done in such a situation is controversial: Some recommend maintaining the little leeway and refraining from taking big steps. The others are calling for a strong signal to be sent and interest rates to be cut significantly – on the grounds that waiting increases the risk of having to correct later with an even greater interest rate cut.
The SNB has decided on the second option – apparently after a long period of back and forth. It remains to be seen whether she is right and whether this big step can prevent a relapse into a regime with negative interest rates or massive foreign currency purchases. It is still too early to break the baton over the new leadership. However, it can be said that in a dilemma the newly formed management chose the more expansive of two options. Whether conclusions can be drawn from this about a looser monetary policy in the future is likely to be discussed in the markets.
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