Swiss National Bank Rate Cut?

March 11, 2009

A story is circulating that the SNB inadvertently leaked news of a 25-basis point 3-month Libor target rate cut to 0.25%, within a new target range of 0-0.75%.  Such would match market and my own expectations if true.  The quarterly announcement is set for Thursday, and the Bank website still shows a target range of 0-1.0%.  Reportedly, Swiss monetary officials also will unveil lower forecasts for growth and inflation.  In December, they revised projected CPI inflation to 0.9% in 2009 and 0.5% in 2010 from prior projections of 1.9% and 1.3%.  Growth at that time was projected to drop in 2009 by between 0.5% and 1.0%.  A drop of at least 1.5% and perhaps 2.0% now seems plausible.  There have been four previous cuts from a peak of 2.75% — by 25 bps last October 8th, 50 bps on November 6th, 100 bps two weeks later on November 20th, and 50 bps on December 11th.  Between mid-December and its March 6th 2009 high, the franc’s euro cross advanced 8.9%, and such has appreciated by over 13% against the euro since the beginning of 2008.  Like the yen, the franc had been a former carry-trade financing currency, which has become well-bid recently amid the unwinding of such trades in these risk averse times. This unraveling tightens monetary conditions, requiring a further rate cut just to restore policy to the desired degree of looseness achieved last autumn.  With a 0.25% target interest rate, the Swiss National Bank will have run out of rope to ease policy further via interest rates.  The next step after tomorrow’s reduction, as with other central banks, would be quantitative easing, that is the purchase of longer-term financial assets to accelerate growth in Switzerland’s money stock.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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