"Weakening the Swiss Franc is SNB's Goal"

Image © Pound Sterling Live, SNB.

The Swiss National Bank (SNB) cut interest rates and signalled more were to come, and analysts say the goal is to trigger a weaker Franc.

The SNB cut its main policy rate by 25 basis points to 1% owing to the sharp deceleration in Swiss inflation.

The August inflation report put CPI at 1.1% year-on-year, well within the SNB's traget range.

But, this is significantly lower than the SNB had been expecting. New forecasts from the central bank's economists showed a notable downgrade to average inflation in 2025 to 0.6% from 1.1%. The 2024 forecast remains at 1.3%, but the 2026 projection is lowered from 1% to 0.7%.

"The SNB put the revision of its forecasts down to the appreciation of the Swiss franc, the fall in oil prices and the decline in electricity prices, but also from lower second-round effects," says Charlotte de Montpellier, Senior Economist for France and Switzerland at ING Bank.

In a dovish communication, the SNB stated that the "downside risks to inflation are currently higher than the upside risks".

"Weakening the Swiss franc is SNB's goal," says de Montpellier.

She explains that the "very low" inflation forecast for 2025, 2026 and 2027 and the characterisation of risks as being on the downside are a strong signal that the SNB is prepared to cut rates further in the coming months.

"While the SNB only cut the policy rate by 25bp today to 1.0%, the accompanying statement was very dovish and indicated that there are at least two more rate cuts on the way, probably in 25bp increments in December and March," says Adrian Prettejohn, Europe Economist at Capital Economics.

The SNB said it "remains prepared to be active on the foreign exchange market if necessary," which signals it is ready to bolster its foreign exchange reserves to weaken its domestic currency.

It took aim at the Franc, saying that over the next few quarters, growth in Switzerland is likely to be moderate "given the recent appreciation of the franc and the mixed trend in the global economy."

Will the SNB succeed in pressuring the Franc?

de Montpellier said it is not certain that this messaging will be enough given the global geopolitical uncertainties that tend to push up the Swiss franc. She thinks it seems likely that the SNB will significantly increase its interventions on the foreign exchange markets in the coming months to weaken the Swiss franc directly.