Swiss National Bank Cuts Target Interest Rate to 0.50%

December 11, 2008

The Swiss National Bank targets 3-month LIBOR. It sets a range, usually 100 basis points in width, and generally aims for the middle of that range, which was cut in half today from 1.0% to 0.5%. There were three earlier cuts of 100 basis points on November 20th, 50 basis points on November 6th and 25 basis points on October 8th. From a pre-October 8th peak of 2.75% to 0.5%, the cost of money fell 81.8% in just over two months. From that perspective, no other central bank has eased credit more decisively, not the Fed (50% from 2.0% to 1.0%), not the Bank of England (-60% from 5.0% to 2.0%), not the Bank of Japan (40% from 0.5% to 0.3%) and not the ECB (-41.2% from 4.25% to 2.25%).

A statement from Swiss National Bank officials asserts that the Swiss economy “will be heavily affected” by sharply deteriorated growth in the U.S., Europe and Asia and by worsened international financial markets. Officials are taking advantage of “room for maneuver” created by “a radical adjustment [downward] of the inflation forecast.” For the four quarters through 3Q09, projected on-year inflation was trimmed by between 1.1 and 1.3 percentage points, and the forecasts for the ensuing seven quarters were slashed by an average of 0.78 percentage points. The old and new inflation paths can be compared by clicking here. The low-point of 0.38% is shown occurring in 4Q09, and inflation thereafter rises to just 0.64% in 3Q10. All of such boils down to projected CPI inflation of 0.9% next year and 0.5% in 2010 following 2.7% in 2008, 0.7% in 2007, 1.1% in 2006 and 1.2% in 2005. The president of the SNB, Roth, conceded that there may be some months next year when inflation dips under zero. If a sense of price stability exists between 1.7% and 1.9%, sub-zero readings are as risky as readings above 3.9%. In fact, the danger is much greater, because it is much easier to combat excessive inflation than to rectify deflation as the recent Japanese experience and the more distant policy challenges of the 1930’s attest.

Today’s Swiss statement does not comment on the Swiss franc, specifically its possible exposure to selling pressure from comparatively very low Swiss interest rates. The fact is that depreciation would help to lift the cost of imports and thus counteract deflation in general. Moreover, there is no guarantee that low and falling interest rates would be correlated with a depreciating franc in the current environment. Just look at the yen, which has been the strongest major currency of late.



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