By John Revill

BERN (Reuters) -The Swiss National Bank cut its interest rate by 50 basis points on Thursday, its biggest reduction in almost 10 years, responding to weaker than expected inflation in Switzerland and growing uncertainty about the global economy.

The central bank flagged tepid price increases, rising risks around future U.S. economic policy and political hazards in Europe as it reduced its policy rate from 1.0% to 0.5%, the lowest since November 2022.

While markets had predicted the move, more than 85% of economists polled by Reuters had expected a smaller cut of 25 basis points.

The Swiss franc weakened after the decision, leaving the euro up nearly 0.7% on the day at 0.9339 francs and the dollar up 0.4% at 0.8883 francs.

Swiss stocks rallied, pushing the main Zurich index up 0.45% on the day.

The cut is the steepest drop in Swiss borrowing costs since the SNB’s emergency rate reduction in January 2015 when it suddenly quit its minimum exchange rate with the euro.

“With our easing of monetary policy today we are countering the lower inflationary pressure,” the SNB’s new chairman Martin Schlegel told reporters.

“We will continue to monitor the situation closely, and will adjust our monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term,” Schlegel added.

He also left the door open for further interest rate cuts next year, but said it was now less likely the SNB could take rates below 0% – a possibility he has recently flagged.

“At the current juncture we cannot exclude negative interest rates in the future,” he said. “Now with these cuts today the likelihood of negative rates has become smaller.”

Thursday’s decision was the first under Schlegel, and saw an acceleration from the policy of predecessor Thomas Jordan, who oversaw three reductions of 25 basis points this year.

It was made possible by low Swiss inflation, which was 0.7% in November, and has been within the SNB’s 0-2% target range, which it calls price stability, since May 2023.

Schlegel said uncertainty about future price developments was still high as the central bank forecast that Swiss inflation in 2025 would be lower than previously expected at 0.3%.

LOWER RATES ELSEWHERE

The actions of other central banks would also be taken into account, Schlegel said, although the SNB’s focus remained on developments at home.

The European Central Bank is expected to cut rates later on Thursday and the U.S. Federal Reserve on Dec. 18. The Bank of Canada cut its main policy rate by 50 basis points on Wednesday.

Narrowing interest rate differentials between Switzerland and other countries increase the attractiveness of the safe-haven franc, boosting the currency.

The franc’s appreciation is an additional headache for Swiss exporters, making their exports more expensive when they are already facing subdued demand in Europe and China.

The cut was welcomed by industry associations Swissmem and SwissMechanic.

“This is a good decision,” said Jean-Philippe Kohl, Deputy Director and Head of Economic Policy at Swissmem. “The lower key interest rate will dampen the upward pressure on the Swiss franc.”

Low inflation and risks to the European economy and thus to the Swiss economy were probably the major drivers for the rate cut, said UBS economist Alessandro Bee.

“Furthermore, by cutting by 50 basis points the SNB is likely to widen the interest rates differential and thereby pre-emptively counter excessive Swiss franc strength.”

Schlegel said the SNB was ready to intervene in foreign exchange markets if necessary, although interest rates remained its primary tool.

“The SNB softened its forward guidance for possible further cuts. But with the latest move the SNB likely cemented the market expectations for lower rates,” said Alexander Koch, head of macro and fixed income research at Raiffeisen.

“And if the SNB does not deliver at the coming meetings, there is ample potential for renewed franc strength.”

(Reporting by John Revill, Additional reporting by Rachel More, Matthias Williams, Andrey Sychev, Amanda CooperEditing by Dave Graham, Thomas Seythal, Kirsten Donovan, Alexandra Hudson)

---