By Naomi Rovnick
LONDON- Markets are racing ahead to bet on big central banks lowering borrowing costs after Switzerland on 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 percent from 1.75 percent , 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 percent chance of an ECB rate cut by June from less than an 80 percent chance late on Wednesday. BoE expectations moved to a roughly 70 percent chance of a June cut, from less than 60 percent on Wednesda
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 percent on Thursday but said the economy was heading in the right direction for cuts.
Unlike in the UK and the euro zone, the headline inflation rate in Switzerland, at 1.2 percent in February, is within the SNB’s 0-2 percent 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 percent against the euro last year fell to nine-month low against the currency on Thursday and dropped over 0.5 percent 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 percent as the price of the debt rose, heading for its best daily performance in almost a month.