The outbreak of the coronavirus has put the Swiss National Bank in a difficult position. A further rate cut would add to the woes of Switzerland's financial market.

Economists tend to agree: the outbreak of the new coronavirus in Europe, but also in the U.S., is weakening demand and will have dire consequences for many companies. The big central banks in the U.S. and in the U.K. have already cut their key interest rate by half a percentage point.

Tomorrow Thursday, the turn is on the European Central Bank (ECB), and Christine Lagarde has already given an early warning of things that might follow. In a telephone conference on Tuesday evening, she warned leaders of an economic shock akin the financial crisis and urged them to act swiftly, according to media reports. She also announced that the bank would take steps to support the economy this week.

Decisive Action Expected

With Lagarde’s comparison to the financial crisis, with the dramatic measures taken by the Italian government and the economic consequences they will entail and with the step by the Bank of England, the ground has been prepared for a decisive step by the ECB.

Depending on the reach of these measures by the ECB, the Swiss National Bank (SNB) will be put under pressure to act as well. The directorate led by Thomas Jordan has repeatedly said that the rate spread to the euro region was key to prevent the franc from appreciating further – because a stronger franc hampers exports.

Can the SNB Wait for a Little While Longer?

Credit Suisse therefore expects the SNB to maintain the spread. In an analysis, Maxime Botteron wrote that the Swiss monetary authority would only act now if the ECB were to cut its benchmark by at least 20 basis points. But, in general, Credit Suisse believes that the SNB wants to wait until the second quarter before cutting its key rate because the effect on the economy by the virus spread is unclear at this moment.

Both the ECB and the SNB are in a more complex situation than the Fed and the Bank of England because here and in the euroregion, the rates are already below zero. The question is how much a further cut would actually help firms that face an urgent crisis.

In the case of the SNB, it is worth noting that monetary policy is targeting directly the value of the franc and only indirectly the course of the economy. If demand were to slump and if interrupted supply chains were to impair production, Switzerland’s business would probably be better off talking to the government than the SNB.

Economic Measures Remain an Option

The Swiss government has made huge surpluses in recent years and has cut the level of its debt substantially. Switzerland therefore has plenty of scope to decide on an economic stimulus package if such measures were deemed necessary.

UBS on Wednesday said that the spread of the virus may be contained. The economy inevitably would take a hit in the first half of the year but would also likely recover in the second half. The bank cut its forecast for full-year growth to 0.7 percent from 1.1 percent.

Pressure on the Financial Market

Should the SNB be forced to cut its key rate, this move would increase the pressure on the financial market. The likelihood that banks would demand their clients to pay for the penalty the central bank is demanding for cash would rise.

One more reason why it seems important that any such rate cut would be maintained for a short time only.