On December 12, the Swiss National Bank (SNB) made a significant announcement by cutting its policy interest rate by 50 basis points to 0.50%. This decision marks the fourth consecutive rate decrease in 2023 and represents the largest reduction since an emergency rate cut back in January 2015.

Initially, market analysts had anticipated a more modest rate cut of 25 basis points, but the SNB's decision suggests a deeper concern regarding economic conditions and inflation trendsThe question arises: why has the SNB opted for such an aggressive reduction?

In its official statement, the SNB cited decreasing potential inflation pressures as the main reason for this bold moveThe central bank stressed its commitment to closely monitor the economic situation and adjust monetary policy as needed, ensuring that inflation remains aligned with its stability goals in the medium termRecent data showed that inflation in Switzerland has fallen below expected levels again

The Consumer Price Index (CPI) year-on-year growth decreased from 1.1% in August to 0.7% in November, indicating a reduction in the price increases of goods and services.

Looking ahead, the SNB offered its forecasts for inflation rates, predicting that if the current rate of 0.5% is maintained, the annual inflation rate for 2024 would be 1.1%, followed by 0.3% in 2025 and 0.8% in 2026. These projections highlight a subdued inflationary environment, suggesting that economic activity may not be generating the expected upward pressures on prices.

The SNB also noted that global economic growth was moderating in the third quarter of 2024, with inflation rates in various countries getting closer to central bank targets, leading to a trend of rate cuts among several major economiesThe central bank remains cautious but optimistic, anticipating that potential inflation pressures from abroad might ease over the next few quarters, which could support a continued moderate pace of global growth.

Despite this cautiously optimistic outlook, the SNB expressed a clear awareness of the uncertainties surrounding the global economic landscape

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The future direction of U.Seconomic policy remains ambiguous, and there has been an uptick in political uncertainty across EuropeFurthermore, geopolitical tensions could dampen the trajectory of global economic activity, and some countries may experience a resurgence in inflation.

Domestically, the SNB reported modest GDP growth in Switzerland during the third quarterWhile the service sector has shown signs of strengthening, the manufacturing sector has produced a decline in added valueAdditionally, the unemployment rate saw a slight rise, yet overall capacity utilization remains normalThe SNB foresees an uptick in economic growth in the coming year, attributing this rebound to the cumulative effects of recent accommodative monetary policy measuresIt estimates that Switzerland's GDP will grow by approximately 1% for the year.

The SNB’s President, Thomas Jordan, mentioned that the bank would be comfortable allowing inflation to temporarily sit below the 0-2% target range

He emphasized that interest rate cuts remain a primary tool for further easing if necessary, and the SNB is prepared to intervene in the foreign exchange market as requiredJordan also stated that while negative interest rates are not favored by the bank, they have proven effective; the SNB may resort to this policy again if conditions warrant it and can decide on such measures between quarterly meetings.

In the wake of the latest interest rate reduction, market reactions were significantFollowing the SNB's announcement, the Swiss franc plunged against the U.SdollarAs a matter of fact, since September, the SNB's actions to cut rates have been quite effective in curbing the appreciation of the Swiss francFrom a peak of 1.194 on September 1, the Swiss franc had declined markedly, settling around 1.1265 against the dollar.

Swiss equities also exhibited a positive reaction to the lowered rates, with the Swiss Market Index (SMI) climbing over 1% at one point, though it later retracted those gains

Notably, the SMI index recorded an increase of 5.48% year-to-date, despite the volatility experienced throughout the year.

Elsewhere in the world, other central banks, including the Reserve Bank of Australia, the Bank of Canada, and the European Central Bank, are preparing for their last interest rate meetings of the yearThe Federal Reserve of the United States, however, has yet to finalize its decision, making the upcoming U.SConsumer Price Index (CPI) report critical for market expectations.

Recent data from the U.SLabor Department indicated that the CPI for November rose by 2.7% year-on-year, with a month-on-month increase of 0.3%, slightly up from the previous monthThis inflation data aligns closely with market expectations and could raise the likelihood of the Fed considering further rate reductions following its upcoming meeting.

Despite the inflation data meeting expectations, many investors still foresee a 25 basis point cut from the Fed next week