Switzerland's economic outlook has dimmed, with several economists recently lowering their forecasts for the coming year. This provides solid arguments in favor of a larger rate cut of 50 basis points.

The Swiss National Bank (SNB) is always capable of surprises, notes Karsten Junius , Chief Economist at Bank J. Safra Sarasin , in a Linkedin post (image below). «At least when it makes economic sense,» he writes. Junius anticipates a rate cut from the current 1.0 to 0.5 percent.

Karsten Junius from J. Safra Sarasin Bank. (Image: Linkedin)

The arguments for a large rate cut are compelling. Price stability serves as the central point of orientation for SNB monetary policy and its most important mandate, as the new Chairman of the Governing Board, Martin Schlegel, frequently ephasizes.

There is currently still plenty of room for maneuver. Inflation in Switzerland has clearly fallen below the upper limit of the target range of 0 percent to 2 percent. Although inflation in November rose slightly year-on-year to 0.7 percent, up from 0.6 percent in October, it remains very low.

Growth Below Potential

Switzerland's economic growth remains below potential, and unemployment is rising, Junius adds. An increase in demand for Swiss export goods from neighboring countries is unlikely.

The bank economist also expects inflation to continue to decline next year. Several factors support this view. For example, electricity prices will drop by around 10 percent in January. Due to the expected lower reference interest rate from March, rents could even decrease slightly. In addition, lower producer prices will increase disinflationary pressure.

Developments in the labor market suggest that future wage growth will be lower than this year. The number of unfilled positions is decreasing, and unemployment is rising.

Effect of Forward Guidance Exhausted

«A 50-basis-point cut is now necessary because the SNB has already created expectations for a rate cut through its communication strategy,» Junius argues. This has already exhausted its potential to use forward guidance as a substitute for a larger rate cut. «It also makes no sense to resort to foreign exchange market interventions, as the Swiss franc is currently trading close to its fair value.»

Economic Forecasts Lowered

Raiffeisen or BAK Economics have also recently warned of uncertainties for the Swiss economy in 2025 in their forecasts. BAK Economics now expects Swiss GDP growth of 1.4 percent for 2025, slightly revised from the previous 1.5 percent. Raiffeisen forecasts GDP growth of 1.3 percent for 2025, a figure also recently adopted by Julius Bär.

Using interest rate policy, the SNB will also try to manage the external value of the franc, according to BAK. «The Swiss National Bank is unlikely to tolerate excessive appreciatio of the franc and could even bring negative interest rates back into play.»