Pound to Swiss Franc Rate Hits 8-Month Best

March 21, 2024 - Written by Frank Davies

STORY LINK Pound to Swiss Franc Rate Hits 8-Month Best

The Swiss franc declined sharply following the Swiss interest rate cut.

The Euro to Swiss franc (EUR/CHF) exchange rate jumped to 8-month highs at 0.9780 before a correction to 0.9750.

The Pound to Swiss franc (GBP/CHF) exchange rate also spiked to 8-month highs just below 1.1450.

Markets will now look at the Bank of England decision for fresh GBP/CHF moves.

USD/CHF jumped to 4-month highs above 0.8950 as robust global risk appetite also undermined the Swiss currency.

According to Rabobank; “A rate cut this week would further undermine the outlook for the CHF, particularly given the ‘higher for longer theme’ associated with the Fed.”

There was also an important global impact with European currencies on the defensive amid speculation that the ECB and Bank of England would move more quickly than expected to cut rates.

In particular, there will be increased talk that the ECB could make a move in April.

The Swiss National Bank (SNB) cut interest rates by 25 basis points to 1.50% at the latest meeting.

Consensus forecasts were for rates to be held at 1.75%, although there was some significant speculation that the bank would make the move to cut rates.

This was the first major central bank to cut rates in the current monetary cycle.

According to the SNB; “The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective.”

The bank noted that inflation had been below the 2% target for some months and, according to the new forecast, it is likely to remain in this range over the next few years.

It added; “With its decision, the SNB is taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year. The policy rate cut also supports economic activity. Today’s easing thus ensures that monetary conditions remain appropriate.”

The central bank will remain vigilant and commented; “The SNB will continue to monitor the development of inflation closely, and will adjust its monetary policy again if necessary to ensure inflation remains within the range consistent with price stability over the medium term.”

The reference to franc gains in real terms illustrates that the central bank considers that the currency has strengthened slightly too far and that the bank will look to resist currency gains in real terms.

Rabobank added; “In view of the decades of disinflationary/deflationary pressures suffered by Switzerland and an overvalued exchange rate, we expect that the SNB would welcome a softer CHF.”

From a longer-term perspective, however, the SNB will remain determined to keep inflation under control.

According to Colin Asher, Senior Economist Mizuho Bank commented; "The scale of the inflation problem in Switzerland has never been particularly large, and the Swiss National Bank is not at risk of inflation expectations becoming unanchored. Consequently, with the inflation outlook benign, the Swiss National Bank has felt free to ease policy.

He added; “The SNB only meets every quarter, and in the wake of the dovish Fed meeting, it's certainly possible that other central banks would have leapfrogged by the time the next meeting comes around, and that has helped them get over the line this time."

According to Jan Von Gerich chief analyst at Nordea; "It's the first central bank in the developed world to ease so that shows the direction where the others are going.

He added; “The SNB was always the first likely mover, so this shouldn't have an impact on what the others will do. But from the markets' point of view, this does open the door to what could happen elsewhere.”

Justin Onuekwusi CIO at St James’s Place still expects other central banks will not rush; "Central banks in general will err on the side of the caution."

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TAGS: Pound Swiss Franc Forecasts