Switzerland becomes first major economy to cut interest rates, citing inflation below 2%

March 21 (UPI) -- Switzerland became the first major economy to cut interest rates in a shock decision on Thursday.

The Swiss National Bank said it decided to cut interest rates by 0.25 percentage points to 1.5%, effective Friday, citing successful efforts to combat inflation.

"The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective," the SNB said in a statement. "For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability."

The bank said in February Swiss inflation was 1.2%, with the decline due to lower goods inflation. According to the SNB, inflation is currently being driven by higher prices for domestic services.

According to the SNB inflation in Switzerland is forecast to be 1.4% for 2024, 1.2% for 2025 and 1.1% for 2026.

The SNB said economic growth is likely to remain modest this year.

"The weak demand from abroad and the appreciation of the Swiss franc in real terms over the past year are having a dampening effect," the SNB statement said. "Overall, Switzerland's GDP is likely to grow by around 1% this year. In this environment, unemployment is likely to continue to rise gradually, and the utilization of production capacity is likely to decline somewhat further."

SNB Chairman Thomas Jordan said in an interview with CNBC that whether or not there will be more rate cuts this year is uncertain.

"We will see in June whether the situation is different, whether inflationary pressure continues to decline, then we'll make a new decision in June," Jordan said.

The surprise rate cut comes as many other major economies have continued to hold their interest rates steady after consistent rate hikes as economies sought to recover from the impact of the COVID-19 pandemic.

The Bank of England on Thursday kept its interest rate unchanged at 5.25%, a day after the U.S. Federal Reserve also left key interest rates unchanged at between 5.25% and 5.5%.

Earlier this month the European Central Bank also left interest rates steady as inflation stood at 2.6% in February.

Japan decided Tuesday to hike its benchmark interest rate with Bank of Japan Policy Board members lifting the rate out of negative territory to 0.1%.