SNB Interest Rate cut of December 12, 2024
The SNB has lowered its policy interest rate by 50 basis points to 0.5%. The decision was justified by the sharply reduced inflationary pressure in the last quarter. By easing monetary policy, the Swiss National Bank is addressing recent inflation developments. However, the SNB has emphasized that it will continue to monitor the situation closely and adjust monetary policy as necessary to ensure price stability in the medium term.
Further Decline in Inflationary Pressure
The SNB’s decision in December 2024 was largely driven by a continued easing of inflationary pressures. In November, inflation slowed to just 0.7%, following rates of 0.6% in October and 0.8% in September. Both goods and services contributed to this downward trend, though domestic service prices remain stubbornly high.
Thanks to these developments, Switzerland’s inflation rate now stands below that of all major economies and well within the SNB’s target range for price stability.
Inflation forecasts have also improved since the previous rate decision. The latest conditional forecast is lower than the one issued in September, with falling prices for petroleum products and food playing a key role. These factors gave the SNB room to take further action in December.
Economic Growth Remains Sluggish
Another key factor behind the SNB’s December 12 rate decision was the subdued economic outlook. Of particular concern is the weak performance in major export markets such as Germany, China, and the United States.
In Switzerland, the unemployment rate has recently edged up, while the number of job vacancies has declined—both of which are signs of an economic slowdown. The SNB projects GDP growth to end up at around 1% for the current year, with an expected growth of between 1% to 1.5% in 2025.
However, these forecasts remain clouded by uncertainty, with developments abroad posing the greatest risk.
Swiss Franc Hits Record High Ahead of December Rate Decision
A key issue leading up to the SNB’s recent rate decision was the renewed appreciation of the Swiss franc, which climbed to a record-high level against the euro.
This upward pressure stems in part from interest rate cuts in the Eurozone and the United States. When policy rates in these regions fall, the euro and the US dollar become less attractive compared to the franc, as investments in those currencies yield lower returns. This shift drives increased demand for the franc, pushing its value higher.
Lower policy rates abroad increase the pressure on the SNB to follow suit and cut its own rate. Alternatively, the SNB could intervene directly in the foreign exchange market by buying or selling foreign currencies—a strategy it has employed in the past when a strong franc posed a threat to the Swiss economy and monetary policy proved insufficient.
The effects of a strong franc on the Swiss economy are double-edged. On the one hand, a strong Swiss franc mitigates the impact of imported inflation on domestic prices. On the other hand, it puts a strain on the export sector, as Swiss goods become more expensive for foreign buyers. Stabilizing the franc’s exchange rate remains a key priority for the SNB, alongside controlling inflation.
Big or Small Rate Cut?
Ahead of the December 12 rate decision, market participants and analysts were once again split about the scale of the SNB's move. Two scenarios were widely considered:
- A 0.25 Percentage Point Cut: Until a few weeks before the decision, most analysts agreed that the SNB would lower the policy interest rate by 25 basis points.
- A 0.5 Percentage Point Cut: In the weeks and days leading up to the decision, however, several analysts revised their forecasts. These adjustments were influenced by updated inflation projections and signs of subdued economic growth.
Interest Rate Forecasts for 2025
Just a few months ago, most economists agreed that beyond one or two rate cuts, there wouldn’t be much room for further adjustments, and the policy interest rate would likely stabilize between 0.5% and 1% over the long term. As recently as late September, very few expected rates to drop below 0.5%, with more conservative projections suggesting the interest rate cycle might already have come to an end.
However, many market observers have since sharply downgraded their forecasts. A growing majority of economists now predict that the policy interest rate will fall to 0.25% or even 0% during 2025. This scenario has become increasingly plausible, particularly in light of the subdued economic outlook. Even negative interest rates, considered virtually impossible a few months ago, are no longer ruled out.
Competing Objectives in Interest Rate Decisions
The SNB’s monetary policy always involves balancing multiple, often conflicting, objectives. Key goals include stabilizing prices, managing economic growth, and controlling the exchange rate of the Swiss franc.
In general, price stability is the SNB’s most important objective. However, as inflation becomes less of a concern—as it has this year—the SNB can shift its focus to other factors, such as the franc’s exchange rate and economic growth.
First Rate Cut Under New SNB Director
The December 12 decision also marked the start of a new era at the Swiss National Bank. It was the first major policy move under Martin Schlegel, who took over in September from long-serving SNB chief Thomas Jordan. Most analysts expect that the SNB will maintain its proven course under Schlegel’s leadership.
Mortgage Rates Decline Further in Q4 2024
The interest rate environment, shaped in part by SNB decisions, has a direct impact on mortgage rates and consequently on real estate demand. Since the last rate decision, conditions in the mortgage market have eased further.
As of early December 2024, the lowest rates for 10-year fixed-rate mortgages were just under 1.2%, while 5-year fixed-rate mortgages were available for less than 1.1%. SARON-based mortgages hovered around 1.65%.
