06:12 AM EDT, 09/27/2024 (MT Newswires) -- The announcement of a 25bps rate cut by the Swiss central bank on Thursday highlighted one clear fact -- the SNB feels constrained by the limited capacity to ease the monetary stance and wishes to use what remains sparingly, said Mitsubishi UFG.

The decision was in line with the consensus but MUFG argued that the SNB should have been bolder given the current inflation level. The Swiss central bank could have cut 50bps and provided a strong message that it would turn to foreign exchange intervention to halt the appreciation of the Swiss franc given the SNB was at risk of missing its inflation goals to the downside over the medium-term, MUFG said.

However, whether the SNB had been more aggressive on Thursday or not it wouldn't have masked the reality that the lower bound's limits are very real for the SNB relative to other G10 central banks, bar the Bank of Japan, stated MUFG.

The OIS curve in Switzerland implies a further 60bps of cuts by June which takes the policy rate to between 0.50% and 0.25%, wrote the bank in a note to clients. However, the 60bps of easing expected in Switzerland by mid-year is in sharp contrast to the 150bps from the European Central Bank, 125bps from the Bank of England and 170bps from the United States Federal Reserve.

Even the Reserve Bank of Australia which has yet to cut and is communicating more hawkishly than any other G10 central bank -- again bar the BoJ -- is priced to cut by about 90bps by mid-year.

The communications from the SNB Thursday were as expected given the cut was smaller than many expected, pointed out the bank. Outgoing SNB President Thomas Jordan stated further rate cuts "may become necessary in the coming quarters" while incoming President Martin Schlegel stated on Bloomberg that "it is likely" that further cuts will be required.

The Monetary Policy Statement Thursday revealed inflation forecasts considerably lower than in June with the Q4 2025 level cut from 1.1% to 0.5% and in Q4 2026 from 1.0% to 0.7%. The final estimate as of Q2 2027 was estimated to be 0.6%.

These are big reductions and were acknowledged in the statement with inflationary pressures having "decreased significantly." The statement cites Swiss franc appreciation over the three-month period since the last meeting as a key factor with imported goods and services inflation contributing to the decline, added MUFG.

With inflation now projected so low over the coming years and with growth in the eurozone still sluggish, it seems a more pro-active foreign exchange intervention policy will be inevitable as a key tool in curtailing further downward inflation pressures going forward, according to the bank.