Switzerland Becomes First Developed Economy to Cut Rates. Will Others Follow?

March 21, 2024

The Swiss National Bank (SNB) surprised the markets this week with its decision to lower the country’s main policy interest rate, making it the first developed economy to begin normalizing interest rates after the post-pandemic inflation boom that has gripped most of the world’s economy.

The central bank lowered its key interest rate by 0.25 percentage points to 1.5%, saying that national inflation was likely to remain below 2% for the foreseeable future. Economists polled by Reuters had expected the Swiss central bank to hold rates at 1.75%.

The move comes hot on the heels of central bank policy meetings in the U.S. and U.K. that left interest rates unchanged. The Federal Reserve did not cut rates, but policymakers are penciling in three rate cuts this year, with the first widely expected to come in July. The timing and magnitude of the Bank of England’s planned cuts remain open questions, but there were signs that the Bank is edging toward cuts at this week’s meeting. Two policymakers who had previously pushed for rate increases changed their outlook and joined the majority who voted to keep rates the same, and one of the nine policymakers pushed for an immediate cut. Central bankers at the European Union, of which Switzerland is not a member, have signaled that they may begin cutting rates in June.

Broad rate cuts will provide a boost to a global economy that, outside the U.S., has been lackluster and provide upward pressure on global financial markets.

The SNB’s move comes the same week that Japan raised interest rates above a negative level for the first time in 12 years. Taken in conjunction with the anticipated cuts in the West, it appears that, after a series of economic shocks from the 2008 Financial Crisis to the Covid pandemic and ensuing inflationary sprial, interest rates are beginning to normalize.

The speed and severity of how interest rates decline will largely hinge on the actions of the Federal Reserve, given the U.S.’s significant role in global financial markets and trade. Analysts suggest that the European Central Bank (ECB) is unlikely to implement substantial rate cuts if the Fed doesn’t do the same, despite the eurozone economy’s stagnation since late 2022. ECB officials maintain that they are prepared to cut rates independently of the Fed if necessary.

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