The reduction of the key interest rate by 50 basis points to just 0,5 percent in the December decision of the Swiss National Bank (SNB) had been expected by some economists but not by the majority.

The fact that the SNB took a major step with this reduction signals a «certain urgency,» says Philipp Burckhardt, Fixed Income Strategist and Portfolio Manager at Lombard Odier IM. «We also expect additional deflationary factors in the coming year, such as falling energy prices or a lower reference interest rate, which should impact rents in the new year.»

It is possible that the SNB intended to send a clear signal regarding the currency—that further appreciation will not be tolerated, aiming to curb potential speculation at an early stage. The likelihood is increasing «that the SNB will once again make greater use of the monetary policy instrument of foreign exchange market interventions,» it is further stated.

Succumbing to temptation

The move is viewed less positively by Santosh Brivio, an economist at Migros Bank. «The SNB has succumbed to the temptation of using a large interest rate step to make a statement against the challenging situation on the economic and currency fronts. However, the impact will remain limited,» he is convinced.

«With this measure, the SNB signals that it wants to preempt the anticipated interest rate cuts by the European Central Bank (ECB) and the US Federal Reserve (Fed),» says Mabrouk Chetouane, Head of Global Market Strategy at Natixis Investment Managers. «However, the room for further interest rate cuts is shrinking, and the previous rate cuts raise the question of what other instruments the SNB still has at its disposal.»

Intervention in the foreign exchange market if necessary

At the press conference, SNB President Martin Schlegel emphasized that, with regard to the franc, both available tools would continue to be used if necessary. «Interest rate cuts remain our main tool if monetary policy needs to be further eased. At the same time, we remain ready to intervene in the foreign exchange market if needed,» he said at the press conference.

Actions had to follow words

Even beforehand, Karsten Junius, Chief Economist at Bank J. Safra Sarasin, had deemed a significant cut necessary. With its clear forward guidance for a further cut in September, the SNB had already exhausted the potential to use this as a substitute for a larger interest rate cut.

In the typically restrained tone of the SNB, this sounds less urgent: «We will continue to closely monitor the situation and adjust monetary policy if necessary to ensure that inflation remains within the range of price stability in the medium term.»

Inflation lower than expected once again

The necessary room for the large cut was primarily created by price developments. «Inflation has once again been lower than expected since the last assessment,» the SNB writes.

«Uncertainty regarding the economic outlook has increased over the past months. In particular, the future design of economic policy in the US remains uncertain, and political uncertainty in Europe has also risen,» the assessment continues.

Pain threshold for the euro exchange rate

The industry is once again calling on the SNB to ensure that the franc does not continue to appreciate against the euro. «The interest rate cut is a correct step,» says Nicola Tettamanti, President of Swissmechanic. «But the strong franc continues to massively impact SMEs.»

According to a survey, around 85 percent of the association's member companies rate the effects of a weak euro as negative to very negative, and 53 percent see a direct negative impact on their order intake. The majority of SMEs see the pain threshold for the euro exchange rate reached at 0,95.

With today’s decision, the likelihood of negative interest rates in Switzerland also returning has increased.