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Switzerland cuts interest rates for the second time as major economies diverge

The Swiss franc weakened in the wake of the announcement, with the euro rising 0.3% and the US dollar rising 0.5% against the Swiss currency at 8:55 a.m. London time.

Following Thursday’s decision, the SNB set its conditional inflation forecasts at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026. The figures assume an SNB interest rate of 1.25% on the forecast period.

Inflation in the country stood at 1.4% in May. After rising in April, it is expected to reach the same level throughout 2024, according to the latest forecasts from the Swiss Central Bank.

The Swiss bank now said it expects economic growth of around 1% this year and around 1.5% in 2025, anticipating a slight increase in unemployment and a slight decline in production capacity utilization rates.

“In the medium term, economic activity should gradually improve, supported by slightly stronger demand from abroad,” the Swiss central bank said.

In a June 14 note, Nomura analysts described the potential cut as a “balanced decision” and noted that “underlying inflation momentum remains weak, which is likely to increase the SNB’s confidence that inflation will converge towards the midpoint.” . Inflation target.

Switzerland already has the second lowest interest rate among the G10 democracies by a wide margin, after Japan. It became the first major economy to cut interest rates in late March, after the European Central Bank followed suit earlier this month. The question is now growing whether interest rates will be cut for the third time this year.

Kyle Chapman, FX analyst at Ballinger Group, said the SNB’s inflation forecasts “suggest some more caps need to be removed this year, and to me that’s a strong signal that another rate cut is coming in the coming year.” September”. “I expect the SNB to implement a third cut next quarter, and there is a possibility of a fourth cut in December if there is still strong conviction about the restrictive level of monetary policy.”

He pointed out that these expectations leave the Swiss franc in a “weak position.”

But the US Federal Reserve hasn’t blinked yet, and market participants will watch later in Thursday’s session to see whether the Bank of England will make a move to taper inflation after UK inflation rose for the first time in almost three years has fallen to the target of 2%. year. Years.

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