The European Central Bank (ECB) and the Swiss National Bank (SNB) both cut their key interest rates on Thursday, with the ECB making its fourth cut of 2024 while the SNB opted for its biggest rate cut in almost of a decade.
The ECB lowered its deposit facility rate by 25 basis points, bringing it to 3%. The move was widely expected and brings the total rate cut to 100 basis points since the ECB began its current easing cycle in June 2024. At the same time, the SNB cut its key rate by 50 basis points more than expected , reducing it from 1% to 0.5%.
The ECB follows the expected course and announces further reductions to come
While some members of the ECB Governing Council proposed a deeper cut, President Christine Lagarde said the final decision in favor of a 25 basis point cut had been “unanimous”.
“The disinflation process is on track,” the ECB said in a statement, pointing to signs that inflation was converging towards the 2% target. Inflation forecasts have been revised slightly downward, with projections for 2024 at 2.4% (from 2.5%) and for 2025 at 2.1% (from 2.2%).
Growth forecasts have also been revised downwards. The eurozone is now expected to grow by 0.7% in 2024, up from 0.8% previously forecast, and growth in 2025 lowered to 1.1% from an earlier forecast of 1.3%. Lagarde acknowledged that “risks to economic growth remain tilted to the downside,” citing global trade frictions and loss of business and consumer confidence as key challenges.
The ECB also removed a key phrase from its statement, namely that it is no longer committed to “keeping its policy rates sufficiently restrictive for as long as necessary.” The move was seen as a sign of a dovish trend, with markets expecting further cuts in 2025.
The SNB surprises with a cut of 50 basis points
This is the biggest rate cut since the emergency measure in January 2015, when the SNB suddenly abandoned its floor with the euro.
More than 85% of economists surveyed expected a smaller change, of 25 basis points. The SNB attributed its decision to weaker-than-expected inflation and the continued strength of the Swiss franc, which makes it difficult for Swiss exports to be competitive. Inflation in Switzerland stood at 0.7% in November, which is well within the 0 to 2% range set by the SNB for price stability.
“By easing our monetary policy today, we are combating falling inflationary pressures,” SNB President Martin Schlegel said at his first policy meeting as central bank chief. He also suggested further rate cuts remained possible, while saying negative interest rates were now less likely.
Schlegel left the door open for interventions in foreign exchange markets if necessary, stressing that the strong franc could further harm Swiss exporters. The franc depreciated against the euro and the US dollar following this decision.
Market reaction
European stock markets were initially volatile but ultimately closed slightly lower. The cuts had already been largely priced in, and the downward revision to growth prompted caution.
The pan-European Stoxx 600 index ended the day down 0.14%, with mining stocks down 1.7%, while auto stocks gained 0.87%. The German DAX rose 0.13%, the FTSE 100 rose 0.12% and the French CAC 40 edged down 0.03%.
The euro briefly fell against the US dollar after the ECB’s announcement, but then recovered to trade 0.18% higher at $1.051. The Swiss franc depreciated, with the euro gaining almost 0.7% against it.
The divergent scales of action of the ECB and the SNB reflect their different priorities. While the ECB has focused on stabilizing inflation and supporting growth amid possible US tariffs and geopolitical uncertainty, the SNB is grappling with the impact of a strong currency on the Swiss economy, dependent on exports.
