Cai Lian She, December 12 - (Editor: Shi Zhengcheng) On Thursday evening Beijing time, as a 'pioneer' in this round of interest rate cuts among developed countries and major economies, the Swiss National Bank announced a 50 basis point cut. This also means that the country's benchmark interest rate is now only 50 basis points (0.5%) away from zero interest rates.

In simple terms, the Swiss National Bank hopes to limit the appreciation of the Swiss Franc through an extraordinary interest rate cut before other central banks take action in the next two weeks. According to statistics, today marks the largest interest rate cut made by the Swiss National Bank since it suddenly announced the cancellation of the 1.20:1 exchange rate ceiling for the Swiss Franc against the Euro in January 2015.

As most economists only expected the Swiss National Bank to cut rates by 25 basis points beforehand, this decision also impacted the market. The USD/CHF and EUR/CHF saw a short-term rise of 60 basis points.

Swiss Predicament: Low Inflation, Rampant Speculators

Today is also the first time Swiss National Bank President Martin Schlegel announced monetary policy decisions since taking office. He is facing challenges of low inflation and slowing economic growth in Switzerland, while speculators continuously encourage the strengthening of the Swiss Franc, leaving the Swiss National Bank with very limited policy space.

This is also why most economists expect that they will only lower the interest rate by 25 basis points today - this allows for three more cuts to reach 'zero interest rate'. Former President Thomas Jordan has made three rate cuts this year, each by 25 basis points.

However, as a traditional safe-haven asset, speculators have also targeted the unique value of the Swiss Franc during times of economic and political turmoil. Over the past year, the pressure for currency appreciation has intensified, while the political crises in France and Germany have also amplified speculative sentiment towards the Swiss Franc. Since May of this year, the Swiss Franc has appreciated by nearly 700 basis points against the Euro, reaching a nearly ten-year high last month.

The Swiss National Bank expects the country's GDP growth rate to be around 1% this year, slightly rebounding to between 1% and 1.5% next year.

The rise of the Swiss Franc has also increased the pressure on Swiss exporters, who are struggling with weak overseas demand. The industry association Swissmechanic reported in October that the business climate index has dropped to the lowest level since January 2021, and warned that orders, sales, and profit margins will further decline in the fourth quarter.

The Swiss National Bank mentioned in its resolution: 'Potential inflation pressures have decreased again this quarter, and today's monetary policy easing considers this development. The Swiss National Bank will continue to closely monitor the situation and will adjust monetary policy if necessary to ensure that inflation remains within a range consistent with medium-term price stability.'

Schlegel stated at the press conference: 'If monetary policy needs to be further eased, lowering the policy rate will still be our main tool. At the same time, we are still willing to intervene in the Forex market if necessary.'

The Swiss National Bank also released a conditional inflation forecast: with the benchmark interest rate maintained at 0.5%, the Swiss inflation rate is expected to fall to 0.3% next year (previously forecasted at 0.6%), before rising to 0.8% in 2026. The new outlook sets the average inflation rate for 2024 at 1.1%, with the latest announced inflation rate for November being 0.7%. The Swiss National Bank's goal is to keep inflation within the range of 0%-2%.

Zero interest rates... negative interest rates?

As the Swiss National Bank has used up some of its limited 'ammunition', the market expects that the country may return to a 'zero interest rate' state in the coming months, or even possibly go further.

According to Kyle Chapman, Forex Analyst at Ballinger Group, further interest rate cuts from the Swiss National Bank are likely, with zero interest rates possibly appearing by June next year. On one hand, this is because the country has lowered its inflation expectations at every meeting this year, so the inflation forecast for the first half of next year is likely too close (to surpass) the comfort zone of policymakers. Additionally, as the European Central Bank is expected to cut rates further, the uncertainty brought by Trump intensifies safe-haven capital inflow, which may put more appreciation pressure on the Swiss Franc.

After consuming the precious 50 basis points of rate cut space, if the Swiss Franc continues to strengthen, the 'tools' left for Swiss National Bank officials are limited—after firing the last two 25 basis point rate cut 'bullets', they may have to choose between negative interest rates or sustained market intervention.

Schlegel was also asked on Thursday about the depth of the central bank's toolbox. He responded that policymakers 'still have ammunition', and Thursday's decision also reduced the likelihood of a return to negative interest rates.

Later on Thursday, the European Central Bank will also release its interest rate decision, with the market expecting a 25 basis point cut. Because the Swiss National Bank has a longer interval between policy meetings (once every 3 months), today's unexpected rate cut also helps prevent them from being surpassed by the European Central Bank—provided that the European Central Bank does not implement an unexpected rate cut.