Thomas Jordan’s tenure as president of the Swiss National Bank (SNB) concluded with a notable shift in communication strategy, as he announced a 0.25 percentage point cut in interest rates and hinted at potential further reductions. His statements set the stage for his successor, Martin Schlegel, who faces the challenge of navigating monetary policy amid expectations of additional cuts. As inflation remains stable at 0.6 percent, the SNB’s approach towards interest rates and market responses will be closely observed.
Thomas Jordan’s Legacy at the Swiss National Bank
For nearly twelve years, Thomas Jordan led the Swiss National Bank (SNB) as its president, but since his departure almost two months ago, his last statements continue to echo in the financial landscape. During the monetary policy assessment in September, Jordan broke from his usual cautious approach by offering insights into the direction of Swiss interest rate policy.
The Shift in SNB’s Communication Strategy
In a significant move, Jordan announced a reduction in the key interest rate by 0.25 percentage points, bringing it down to 1 percent. He also suggested that additional rate cuts might be necessary in the upcoming quarters to maintain price stability. This marked a departure from the SNB’s historically reserved communication style, leading market analysts to anticipate a further cut to at least 0.75 percent in December.
Jordan’s statements were noteworthy for two reasons. Firstly, he hinted at potential decisions his successor, Martin Schlegel, might face. Secondly, it contradicted the SNB’s previous stance of avoiding forward guidance, which involves signaling future policy intentions. This unexpected commitment surprised many observers.
As Schlegel prepares for his first monetary policy assessment on December 12, he will likely feel compelled to follow through on Jordan’s promise of an interest rate decrease to avoid a negative market response. However, it remains uncertain how Schlegel will navigate monetary policy and communication in the post-Jordan era.
Future Monetary Policy Directions
During a recent appearance at the University of Zurich’s conference “The SNB and its Watchers,” Schlegel remained measured regarding future interest rates yet reaffirmed that a further reduction is likely. The SNB is also poised to intervene in the foreign exchange market if necessary.
With the prospect of additional interest rate cuts, the threat of returning to negative interest rates looms. Schlegel acknowledged that negative rates are still a part of the SNB’s toolkit, although he noted that “No one likes negative interest rates, not even the National Bank.” He emphasized the detrimental effects of global demand declines on the Swiss economy, as the Swiss franc often appreciates during crises, leading to lower import costs and reduced inflation.
Schlegel advocates for a flexible monetary policy framework that accommodates varying inflation rates, shifting away from a strict point target like the 2 percent goal many central banks pursue. Instead, the SNB aims for price stability within a range of 0 to 2 percent, allowing for responsive measures in times of economic shocks.
Currently, inflation stands at a comfortable 0.6 percent, comfortably within this target range. The SNB predicts this inflation rate will remain constant through 2025, with a slight increase expected beyond that. Given this outlook, the rationale behind the hints at further interest rate cuts remains unclear.
The SNB’s communication appears somewhat inconsistent; while the inflation forecast suggests stability, indications of potential rate cuts imply a preference for an inflation rate closer to 1 percent rather than near-zero levels. As the financial world awaits Schlegel’s next steps, the clarity and consistency of the SNB’s monetary policy will be under close scrutiny.