Swiss National Bank Unveils Multi-Pronged Easing Plan

March 12, 2009

Yesterday’s leaked news about a 0.25 basis point rate cut proved correct, and the Swiss National Bank announced other actions to “counter the risk of deflation.”  Swiss monetary officials assume the following even with the new steps:

  • GDP contracting by 2.5-3.0% this year, a downward revision from a drop of 0.5-1.0% assumed last December.
  • On-year CPI inflation, which has fallen since July to 0.2% from 3.1%, averaging minus 0.8% for the rest of 2009, +0.1% from 1Q10 through 3Q11, and only climbing beyond 0.1% to 0.25% in the final quarter of 2011.
  • More serious deflation “should the economy deteriorate more severely than expected.

The latest latest Monetary Policy Assessment outlines several actions.

  • A tighter target band for the three-month Libor rate of 0-0.75%, down from 0-1%.
  • A point interest rate target of 0.25%, down 25 basis points.  Such is the sixth reduction from a peak of 2.75% prior to September.
  • Currency intervention, the buying of euros, to “prevent any further appreciation of the Swiss franc” and to augment liquidity.  A line has been drawn in the sand around 1.485 francs per euro.  This is not the typical volatility-reducing variety of intervention.   SNB authorities are saying enough already to franc appreciation. The downside of such a transparent currency goal is that it creates easier parameters for speculation.
  • Swiss franc bonds will be bought to increased domestic liquidity substantially, reduce long-term interest rates, and thereby flatten the yield curve.
  • Repo operations will be expanded.

The Swiss National Bank has sounded the warning against deflation more bluntly than other major central banks and will delay the implementation of quantitative easing no longer.  Switzerland doesn’t have the weakest economy at the moment, but there is a history of currency appreciation and negative inflation in times of great stress.  The 2.5-3% projected growth rate for 2009 is more pessimistic than private forecasts centered around 1.7%.  The SNB report did not included a growth forecast for next year.  Street projections imply a return to the black.  Monetary officials want to promote that optimism.

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



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