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At the upcoming monetary policy decision of the Swiss National Bank on September 26, the outgoing chairman Thomas Jordan will probably announce a further interest rate cut. Markets assume it's a foregone conclusion that the SNB will cut interest rates, preventing a further appreciation of the Swiss franc against the euro.
The question is how big the interest rate cut will be. The majority of experts are currently assuming a reduction of 0.25 percentage points. However, a small but growing number believe that a more drastic move of 0.50 percentage points is also possible following the Fed's latest decision and in view of the rally in the Swiss franc. The money markets even see a 33% probability of a 50 basis point cut.
Karsten Junius, chief economist at J. Safra Sarasin, belongs to the camp of those who expect a rate cut of 0.25 percentage points. “We believe that a more gradual approach is more appropriate,” the economist said in a research note.
“In our view, this means two further cuts in December and March to a level of 0.5%. The reason for our cautious medium-term assessment is that inflation is falling faster than previously assumed by the SNB. In addition, we expect moderate economic growth, which means that unemployment is likely to rise further.”
Valentino Guggia, economist at Migros Bank, also expects an interest rate cut of 25 basis points to 1% on September 26. “There are several reasons in favour of an easing of monetary policy: the SNB's goal of price stability has been achieved since June last year, while economic growth in Switzerland - excluding the chemical and pharmaceutical industry - has not yet picked up speed,” explains Guggia in an email to Morningstar.
“We expect the SNB to cut interest rates by 25 basis points at the upcoming monetary policy assessment on September 26 in order to prevent a further appreciation of the Swiss franc against the euro,” Martina Honegger-Romahn, portfolio manager at Allianz Global Investors, also wrote in a press release on September 20.
How High are Interest Rates in Switzerland?
The SNB surprised markets at the end of March with an interest rate cut of 0.25 percentage points and was the first of the major Western central banks to cut. This was followed by a further rate cut of 0.25 percentage points in June.
The key interest rate in Switzerland currently stands at 1.25%, which is significantly lower than the key interest rate of other major European banks.
Swiss Inflation Remains Low
Unlike its counterparts in Europe, the SNB does not have to worry about inflation. In August, the Swiss inflation rate fell to 1.1% from 1.3% in July. Compared to the previous month, prices remained stable. Since the beginning of the year, inflation has fluctuated at a low level of between 1.0% and 1.4%.
According to Junius from J. Safra Sarasin, the SNB is likely to lower its inflation forecast on Thursday. This is because the figures have repeatedly surprised on the lower side since the last outlook in June.
What Do Falling Rates Mean for the Swiss Franc?
The central bank wants to curb the appreciation of the franc by easing interest rates. However, its problem is that the key interest rate is already very low. The SNB could - based on steps of 0.25 percentage points - only cut interest rates five times before a negative interest rate environment is reached, notes Martina Honegger-Romahn from AllianzGI.
In contrast, the US Federal Reserve can cut rates 19 times (even after cutting rates by 50 basis points) and the ECB 14 times before rates turn negative, according to Honegger-Romahn.
"The upward pressure on the CHF will increase again in the near future if the Swiss National Bank does not either intervene in the currency markets, return to negative interest rates or implement a combination of both," says Honegger-Romahn.
The focus of the SNB on the exchange rate against the euro is also decisive for Guggia: "The Swiss franc is under sustained upward pressure and has recently stabilised at around 0.94 per euro. By lowering interest rates, the SNB wants to widen the interest rate differential against the eurozone again and thus weaken the franc," says Guggia.
Export-oriented industries could benefit from this, although they will have to contend with low foreign demand, not only due to the exchange rate.
How do Interest Rate Cuts Affect the Capital Markets?
Equity markets tend to rise when interest rates are expected to fall, while bond markets tend to be under pressure. On the other hand, when interest rates are already high, falling interest rates also mean lower bond yields, which pushes up bond prices. Lower interest rates also make existing bonds, especially those issued during a period of high interest rates, more attractive in terms of yields.
At the same time, savings rates on bank accounts are likely to fall, to the detriment of savers. Borrowers, on the other hand, will benefit from lower interest rates as consumer debt and mortgages become cheaper.
Saron Mortgages More Attractive
Prices for Swiss fixed-rate mortgages have been on a downward trend since the middle of the year and are historically very favourable again, reports the news agency awp. With the expected reduction in the key interest rate, Saron mortgages are likely to become more attractive again.
"Since the end of June, interest rates for fixed-rate mortgages have fallen by 0.5 percentage points, as a study published on Monday shows. An average interest rate of 1.94% is currently due for a ten-year term. In June, 2.44% still had to be paid,’" reported AWP.
