Markets ready for more as Switzerland starts clock on rate cuts

Markets are racing ahead to bet on big central banks lowering borrowing costs after Switzerland last Thursday delivered a surprise rate cut, but analysts cautioned that policymakers elsewhere won’t find it as easy to call time on the inflation fight.
The Swiss National Bank (SNB) lowered its key rate to 1.5% from 1.75%, with traders responding by pushing government borrowing costs across Europe lower as the continent’s Stoxx 600 share index hit a fresh record.
Caution remained as to whether the US Federal Reserve would rush rate cuts given that inflation in the world’s biggest economy is running hot.
Still, investors viewed the Swiss decision as a landmark and traders laid down strong bets for June cuts by the European Central Bank (ECB) and the Bank of England (BoE).
Some analysts said these rate-setters could even risk a bout of inflationary currency weakness in a strong-dollar environment by moving before the Fed.
“I doubt anyone would think Switzerland is the sun around which everyone else gravitates, but the fact they have crossed this threshold has to matter,” said Chris Jeffrey, head of macro strategy at Legal & General Investment Management.
Money markets moved to price a 90% chance of an ECB rate cut by June from less than an 80% chance late on Wednesday. BoE expectations moved to a roughly 70% chance of a June cut, from less than 60% on Wednesday.
Jeffrey tipped both the ECB and the BoE, to lower borrowing costs in June, with the Fed perhaps waiting longer.
The BoE held rates at a 16-year high of 5.25% on Thursday but said the economy was heading in the right direction for cuts.
Unlike in the UK and the eurozone, the headline inflation rate in Switzerland, at 1.2% in February, is within the SNB’s 0-2% target range.
Nikolay Markov, senior economist at Pictet Asset Management and a former SNB staffer, said Switzerland was unique among major central banks in having started to worry about inflation falling too far as its currency had strengthened.
“They were worried that the deflationary impact from a strong Swiss franc will persist, and that was the key trigger for them to start the easing cycle earlier than any other developed market central bank,” he said. The Swiss franc, which rose over 6% against the euro last year, fell to nine-month low against the currency on Thursday and dropped over 0.5% against the dollar as the SNB widened the rate gap between Switzerland and its peers.
Elsewhere, after the BoE meeting the yield on the interest rate-sensitive British two year gilt was 12 bps lower on the day at 4.23% as the price of the debt rose, heading for its best daily performance in almost a month.
Germany’s equivalent bond yield fell 6 bps to just over 2.9%.
Bonds tend to get a boost from lower rates, which flatter the real income return from the fixed interest-paying securities.
Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International, cautioned the Fed could wait longer to start easing borrowing costs and that the ECB and the BoE risked currency weakness and more inflation by going first.
The Fed on Wednesday, after hotter than expected US inflation data for February, stuck with its projections for three 25 bps rate cuts in 2024 but also substantially raised its economic growth forecasts.
“We have a Fed which wants to cut, it wants the opportunity to start the cutting cycle but the data is not giving them that entry point,” Ahmed said.
“It is the potential FX moves that obviously worry (the ECB),” he said, adding that the inflationary pressures from a weak pound would create even more of a challenge for the BoE.
UK inflation decelerated to 3.4% in February, but was still above the BoE’s 2% target.
Some investors said they were keen to own UK and European government debt, as whatever the timing of the first cut in Europe, rates were likely to fall.
Joost van Leenders, senior investment strategist at Van Lanschot Kempen in Holland, said his firm was “adding a bit to our euro zone bond exposure and moving towards a position where we benefit from falling yields.”
He said he expected the BoE to cut rates as early as May. — Reuters