Swiss interest rate cut to historic low

13th March 2009, Comments 0 comments

The Swiss National Bank intervenes against a recession.

GENEVA - The Swiss central bank on Thursday cut its interest rate by a quarter point to a range of zero to 0.75 percent, matching a historic low to counter a sharper-than-forecast recession.

The Swiss National Bank warned that Switzerland's economy was threatened by deflation, which could harm price stability and restrain the strength of the Swiss franc.

The SNB cut the three-month London Interbank Offered Rate (LIBOR) down to a range of zero to 1.0 percent at its last quarterly assessment in December.

But the bank again revised its forecast for Switzerland's recession in 2009.

It is now predicting that Switzerland's gross domestic product will decrease by 2.5 to 3.0 percent in 2009 instead of the minus 0.5 to 1.0 percent forecast in December.

"The economic situation has deteriorated sharply since last December and there is a risk of negative inflation over the next three years," the SNB said in a statement.

"Decisive action is thus called for to forcefully relax monetary conditions."

"With these exceptional measures, the SNB is helping to cushion the effects of the economic and financial crisis, with the aim of limiting the risk of deflation," the central bank added.

The quarterly assessment for one of Europe's most prosperous and stable economies also contained a change in the forecast for prices.

Inflation is now expected to reach an average of minus 0.5 percent in 2009, mainly due to lower oil prices.

In December, the bank was forecasting inflation rates of 0.9 percent for 2009 and 0.5 percent in 2010.

"For 2010 and 2011 inflation will remain very close to zero because output will be below potential and unemployment will be high," the SNB said Thursday.

"Should the economy deteriorate more severely than expected there would be a risk of negative inflation," it added.

The interest rate reduction was also designed to counter a further strengthening of the Swiss franc against the euro, which is harming Switzerland's export-dependent economy.

The eurozone is Switzerland's biggest trading partner.

The SNB said it was also purchasing foreign currency on money markets to reduce the Swiss franc and "an inappropriate tightening of monetary conditions."

The announcement immediately affected foreign exchange markets.

The euro regained nearly 3.0 percent to reach more than CHF 1.52 late Thursday, against just over CHF 1.48 at the beginning of the day.

Analysts also highlighted other measures including an increase in liquidity levels and an SNB buy-up of Swiss franc corporate bonds.

"These are aggressive measures," commented Pictet bank analyst Bernard Lambert.

The latest interest rate change continued a reversal of monetary policy begun in the final quarter of 2008 and reduced the interest rate to the same historic low of zero to 0.75 percent maintained between March 2003 and June 2004.

AFP / Expatica

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