The SNB is continuing its easing path, which it initiated in March, with a steady hand and has once again lowered the policy rate by a quarter of a percentage point to 1 percent. This move responds to the declining inflationary pressure reflected in its revised downward inflation forecast. The SNB has not succumbed to the increasingly loud calls from the market in recent weeks for a more substantial rate cut to 0,75 percent.

However, Thomas Jordan, still Chairman of the Governing Board until the end of September, emphasized twice during the announcement of the monetary policy decision at Thursday morning's press conference the direction in which the interest rate trend is heading. «Further rate cuts may be necessary in the coming quarters to ensure price stability over the medium term.» He reiterated at the end of his remarks on monetary policy, «We will closely monitor further developments and, if necessary, further ease our monetary policy to ensure that inflation remains within the price stability range in the medium term.»

Journey to a Lower Interest Rate Continues

In the Q&A session, Jordan denied that the SNB had adopted a forward guidance approach, i.e., making firm statements about the future direction of monetary policy. He argued that this was merely a tool to interpret the inflation forecast and not an unconditional commitment to a future monetary policy path, as has been practiced by other central banks in Europe and overseas, often with mixed results, particularly during low-interest phases to manage market expectations.

Indeed, the reduction in the inflation forecast (especially the significant downward revision of the annual inflation rate for 2025 from 1,1 to 0,6 percent) suggests that the journey to a lower interest rate level is not yet complete. It is also true that the statement is conditional and does not bind the SNB.

Unusually Explicit «Interpretation Aid» for Future Rate Path

However, making such an explicit statement about the future rate path twice in a monetary policy decision is quite unusual. It is likely that the Governing Board wanted to rhetorically bolster the small rate cut, not least with an eye on the foreign exchange market. This also fits with Jordan's assessment that the downside risks to inflation are currently higher than the upside risks.

The strong franc is also a major reason why inflationary pressure has decreased so significantly since the June assessment. Jordan also mentioned the lower oil prices and the prospect of lower electricity prices by 2025. As a result, second-round effects are also expected to be less pronounced in the medium term. Central bankers always keep a close eye on second-round effects, as they can turn a one-off inflation spike into a longer inflationary spiral.

Early Recognition and Action on Downward Pressure on Inflation

The departing Chairman gave an optimistic assessment of the Swiss economy's development. According to the SNB, GDP growth is expected to rise from 1 percent this year to 1,5 percent next year.

Overall, Jordan seemed satisfied that the early rate cut in March (before most other central banks) has proven to be the right decision in light of the subsequent inflation developments. Regarding the significantly expanded SNB balance sheet under his leadership, he pointed out on a suitable occasion that the economic situation in Switzerland would look very different today if the SNB had not made such extensive use of its balance sheet for monetary policy purposes.

Liquidity from the Central Bank for All Banks if Needed

His successor, Martin Schlegel, currently still Vice Chairman, addressed a topic that has gained urgency with the fall of Credit Suisse and that he had already discussed in June: the role of the SNB as a lender to the banking system in a crisis. In normal times, banks can obtain liquidity in the interbank market or through a repo transaction with the SNB. However, the SNB only accepts top-quality securities as collateral for such repos—and in a crisis, such securities can quickly become scarce.

In 2019, the SNB launched an initiative to ensure that it can provide liquidity to all banks (not just systemically important ones) in such situations. Mortgages issued by banks, which account for 85 percent of domestic credit volume, will serve as collateral.

Broader Range of Collateral

«We expect banks to prepare for this,» Schlegel emphasized, almost as a warning. There seems to have been a change in mindset. «When we launched the initiative in 2019, the banks showed little interest. After the experience of 2023, things look very different today.»

Systemically important banks were already able to obtain liquidity against a broader range of lower-quality securities (bonds from lower-rated issuers, securitizations, and equities in various currencies). To reduce its collateral risk, the SNB applies haircuts to these securities; these do not apply in standard repo transactions.

An Offer with Obligations

This offer will now be available to all banks. Details will be worked out in conjunction with the Federal Department of Finance and the Financial Market Supervisory Authority. But it is already clear that banks will have obligations: in the future, they must hold a specific volume of collateral for liquidity access at the SNB.

Antoine Martin, currently head of the III. Department and soon Vice Chairman, provided a preliminary assessment of the introduction of instant payments, which took place on August 20. The assessment was positive: 60 banks are participating, with over 10'000 transactions per day in some cases, and the average processing time is two seconds.

Real Benefits for Consumers?

Martin also highlighted the benefits for consumers, businesses, and commercial banks. For banks, there are no counterparty risks; businesses benefit from simplified liquidity management, and a private buyer of a car, for example, no longer has to wait for the amount to be credited to the seller's account before taking possession. However, for this specific case, cash remains an efficient payment method with an unrivaled track record.

The SNB expects that instant payments will become the new standard in electronic payments in the medium term, with «competitive conditions,» as Martin clarified in view of the still considerable institution-specific fees.