Is the SNB also contemplating a 50 bps cut?

SNB interest rates
The SNB introduced interest rate targeting in 2000. The graph below shows “policy rates” for the SNB and the Federal Reserve and the deposit rate for the ECB since 2000.¹ Since the SNB sets interest rates quarterly, quarterly data is used.

The SNB’s monetary policy is influenced by the outlook for inflation and economic activity in Switzerland. Capturing that outlook in a few data series and in real time is difficult. For instance, when Lehman Brothers collapsed in September 2008 or when Covid started in early 2020, it was immediately clear that the outlook had worsened dramatically. Yet, because of collection and publication lags, it took some time before those events showed up in the data. 

However, the Fed, the ECB and many other central banks react immediately to such changes in the outlook. In a statistical study of the SNB’s interest rate decisions, one can therefore use changes in ECB and Fed policy rates to measure changes in the outlook for Switzerland. We do so below. 

The graph below shows that the major swings in all three policy rates coincide with easily identifiable shocks: the bursting of the dot.com bubble in the early 2000s, the collapse of Lehman Brothers that triggered the Global Financial Crisis, and the surge in inflation after Covid that led all three central banks to sharply raise interest rates from the spring of 2022 onward.

Chart 1. Policy rates

Source: SNB, ECB, FRED. Data as at 14 September 2024.

Episodes of large SNB cuts
The table below looks at the quarters in which the SNB cut interest rates by more than 25 bps. It includes some (lightly edited) quotes from the SNB’s Quarterly Bulletin that motivate the policy changes for the quarters in question. Also shown are policy rate changes by the ECB and Federal Reserve in those quarters, together with the quarterly appreciation of the Swiss franc against the euro. 

It is clear from the table that large interest rate cuts were undertaken in periods of economic weakness, when the ECB and the Federal Reserve also cut interest rates, and in episodes of currency strength. In many cases, these changes were undertaken through a series of cuts, sometimes outside of the regularly scheduled quarterly policy meetings.  

Table 1. Policy rates and exchange rate changes

Notes: percentage change in SNB, ECB and Fed policy rates, percent appreciation in CHF against euro. Sources: SNB, ECB and Federal Reserve. Data as at 14 September 2024.

SNB interest rate changes 
A simple statistical model can be fitted to capture how the ECB and the Fed interest rates change, and how the strength of the Swiss franc, impact on SNB interest rate decisions. According to that relationship, the expected change (in basis points) in the SNB’s policy rate in a quarter equals 0.51 times the change in the ECB’s policy rate in the quarter, 0.18 times the change in the Fed’s policy rate in the quarter, and 0.03 times the appreciation (in percentage points) of the Swiss franc against the euro in the quarter.² The model also provides information about the degree of uncertainty that applies to this relationship. 

The model can then be used to compute the predicted change in the SNB’s policy rate for Q3 2024. The ECB and the Federal Reserve cut their policy rates by 25 bps and 50 bps, respectively, and it assumes that the Swiss franc appreciates by 3.2% against the euro in the quarter. The predicted change in the SNB’s policy rate is 32 basis points with a standard error of 23 bps. 

This suggests that the SNB will cut interest rates by at least 25 bps. However, it also suggests that there is some probability that will cut rates by more than that (and, of course, some small probability that it will leave them unchanged or even raise them). 

Using the predicted changes and the estimated degree of uncertainty, it is possible to calculate the probability of a variety of policy outcomes. ³

The results are interesting: the probability of a 50 bps cut is about 30% and the probability of a 25 bps cut is about 40%.⁴ Thus, the probability of a 50 bps cut is almost as large as the probability of a 25 bps cut. 

Chart 2. Estimated probability of various SNB policy choices

Sources: EFG calculations.

Conclusions
These calculations are all illustrative and little faith should be attached to exact probabilities and forecasts. Nevertheless, and to the extent that history is a guide, they suggest that the SNB could potentially cut rates by 50 bps later this month.

¹ The SNB has only announced a single policy rate since June 2019; before that the “policy” rate used here is defined as the midpoint of the targeting band for the 3-month Libor rate. The Federal Reserve only employed a single policy target until November 2008. After that date the policy rate is defined as the midpoint of the targeting range for the federal funds rate.
² The model is an OLS regression the parameter on the changes in the ECB’s and the Federal Reserve’s policy rate are 0.51 (t = 6.5) and 0.18 (t = 3.3). The parameter on the change in the exchange rate is -0.03 (t = 3.3) The r-squared is 56%.
³ To do so, it is assumed that the distribution of the forecast is normal. 
⁴ There is also about a 20% probability of no change or an increase in the SNB’s policy rate. Commentators often forget that odd things can happen and disregard the probability of such outcomes. But the SNB raised interest rates by 25 bps in 2007Q3 when the Federal Reserve cut interest rates by 50 bps and the ECB left them unchanged.