SWISS NATIONAL BANK TO CUT RATE BY 25BP TODAY

• REASON FOR POTENTIAL CUTS
• OVERVIEW OF SARON
• POTENTIAL EFFECT ON EURCHF

The Swiss National Bank holds the reins on interest rate determinations in Switzerland, setting the official SNB policy rate. By keeping short-term Swiss franc money market rates close to this benchmark, the SNB steers the financial ship. In June 2024, the SNB opted to trim its key policy rate by 25 basis points to 1.25%, in line with market expectations. This move was prompted by a drop in inflationary forces and the resilience of the Swiss franc, guiding the country's monetary policy. Today being Thursday, September 26th 2024 at 11:30am GMT +4, all eyes are on the SNB again as they announce their policy rate decision. Market expectations are high, with a projected 25bps cut from 1.25% to 1.0%, mirroring previous adjustments seen in June and March of this year. Investors are eagerly awaiting the outcome, poised to react accordingly to the potential shift in monetary policy.

Fig. 1. Inflation rate in percentage, Swiss National Bank.

REASONS FOR POTENTIAL RATE REDUCTION

Amongst other reasons, the potential rate cuts by SNB today is supported by the recent inflation data showing a decrease in the annual inflation rate to 1.1% in August 2024, below market expectations of 1.2%. This drop, the lowest since March was driven by lower prices for food, non-alcoholic beverages, and transport. The Consumer Price Index year-on-year fell from 1.3% in the previous months (June and July). The inflation data aligns with the bank's 0-2% range, while the franc remains robust against the Euro. These indicators suggest potential monetary policy adjustments to foster economic growth and stability.                   

OVERVIEW OF SARON

At this juncture, it is important to highlight the significance of the Swiss Average Rate Overnight (SARON). It is a vital interest rate within the Swiss financial. Managed by SIX Swiss Exchange. SARON reflects the average interest rate for Swiss franc-denominated overnight interbank loans. As of September 24th, 2024. SARON stood at 1.21%, slightly below the official SNB rate of 1.25%. SARON is a crucial reference rate in the Swiss financial system, influencing interest rates on various financial products. It is widely utilized by banks, corporations and individuals to manage interest rate risk and determine pricing for loans, mortgages and derivatives.

Fig. 2. Interest rates in percentage, Swiss National Bank

POTENTIAL EFFECT OF THE RATE DECISION ON EURCHF

As markets gears towards SNB September policy rate decision, the EURCHF being in an overall bearish trend on the daily time frame, retraced on Wednesday to 0.9508 whilst targeting Aug. 21st high as per technical analyst. Markets participants expects volatility in the wake of the rate decision and in view of that, if we witness the reduction of rate as forecasted, EURCHF has the potential to surge targeting August high of 0.9580. Meanwhile, the pair is currently being resisted around 0.9500 level with the 50 EMA acting as confluence. Conversely, if the SNB decides to surprise market participants by not lowering rate, EURCHF has the potential to tank, hence continues its overall bearish move with potential target at phycological level of 0.9400 and further to 0.9328 as per analyst point of view.