Leading the world's central banks, Switzerland took the lead in starting an interest rate cut cycle, becoming the first developed economy in the G10 to cut interest rates after a long period of high inflation.

On Thursday, March 21, the Swiss National Bank (SNB) unexpectedly announced an interest rate cut of 25 basis points, lowering the benchmark interest rate from 1.75% to 1.5%, exceeding the general expectation of "keeping interest rates unchanged."

After gradually raising interest rates to a ten-year high of 1.75% since March 2022, SNB has kept the interest rate unchanged twice in a row. Most economists had previously predicted that SNB would not cut interest rates "at least before June this year" 's door.

After the interest rate decision was announced, the Swiss franc exchange rate fell, with EUR/CHF rising 0.5% to 0.9733, and was trading at 0.9741 as of press time.

The U.S. dollar quickly rose by more than 1% against the Swiss franc, trading at 0.8966 as of press time.

Steady cooling of inflation and continued strength of the Swiss franc provided support for the rate cut. In a policy statement, SNB said:

"The choice to loosen monetary policy is due to the effectiveness of the fight against inflation over the past two and a half years."

"Inflation has been back below 2% for several months, within what we consider to be a stable price range. According to new forecasts, inflation is likely to remain within this range in the coming years as well."

Swiss CPI data released at the beginning of the month showed that in February CPI increased by 0.6% year-on-year and 1.2% month-on-month, both slightly exceeding expectations. However, looking at a longer time period, the year-on-year CPI growth rate has steadily dropped from a high of 3.4% in February last year to less than 1%, and has been below 2% for eight consecutive months, showing that Switzerland’s fight against inflation has achieved remarkable results.

SNB also said in this statement that it has lowered its CPI expectations and expects inflation to continue its downward trend.

The SNB has always been known for its sudden actions (such as the sudden abandonment of the Swiss franc exchange rate cap in 2015 and the unexpected 50 basis points interest rate hike in 2022). Before announcing the interest rate decision, SNB had very limited communication on monetary policy. However, institutions including Barclays Bank, Citigroup and Swiss banking giant Julius Baer (BAER) still made forecasts for interest rate cuts.

Some believe that SNB's move will amplify the possibility of interest rate cuts by the Federal Reserve and the European Central Bank during the year, as the weakening of the Swiss franc is expected to put pressure on foreign currencies. Tonight, the Bank of England and Norges Bank will announce their latest interest rate decisions.