Surprise cut in Swiss interest rates

Borrowing costs drop in Switzerland Keystone Archive

The Swiss National Bank (SNB) has surprised the markets by cutting its key interest rate target range by 25 basis points to 2.75 to 3.75 per cent. The SNB said the move was in response to increased economic uncertainty.

The SNB said it intended to keep its target range within the centre of the new band at around 3.25 per cent.

Most economists had expected the bank to leave interest rates unchanged until after the European Central Bank (ECB) meeting next month.

Andreas Höfert, an economist at UBS Warburg, told swissinfo that the SNB was showing its independence of the ECB by moving faster to cut interest rates.

“After the disappointing economic statistics out of Germany on Wednesday most on the market are anticipating a cut in the ECB’s interest rates. This move by the SNB shows its independence,” explained Höfert.

The SNB’s latest prognosis on the economy was based on a decline in oil prices, which had taken place in a very short time, as well as a sharper than expected downturn in the US economy.

This cut is the first downward shift in official rates in nearly three years, and should lead to a reduction in commercial interest rates for consumers across Switzerland.

Walter Metzler, an economist at Credit Suisse, told swissinfo that a general decline in the level of all interest rates is expected as they adapt to the new market level.

“If mortgage rates are coming down this will ease inflation in the rental part of the consumer price index,” added Metzler.

The SNB said that is now expects inflation, after a brief rise, to fall to 1.5 per cent in 2003. The bank also forecasts economic growth in 2001 of 2.2 per cent – down from 3.4 per cent in 2000 – and says this will slow to 1.6 per cent in 2003.

Höfert said he expected another 25 basis point cut in interest rates by the SNB later in the year.

by Tom O’Brien