SNB Cuts Rate, Intervenes to Weaken Swiss Currency

The Swiss central bank cut its interest rate close to zero and started buying foreign currencies to stem the franc’s appreciation as the recession sharpens and deflation looms.

The Swiss National Bank Press Release

"The economic situation has deteriorated sharply since last December, and there is a risk of negative inflation over the next three years. Decisive action is thus called for, to forcefully relax monetary conditions. Against this background, the Swiss National Bank (SNB) is making another interest rate cut and acting to prevent any further appreciation of the Swiss franc against the euro. To this end, it will increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets.

The SNB is lowering the target range for the three-month Libor by 25 basis points, narrowing it to 0–0.75%, with immediate effect. It will use all means at its disposal to gradually bring the Libor down to the lower end of the new target range, i.e. to approximately 0.25%. Thus, the Libor now has a narrower target range of 75 basis points, compared with 100 previously. 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 SNB has a mandate to ensure price stability, while taking economic developments into account. This objective encompasses the prevention of both deflation and inflation. In carrying out its mandate, the National Bank will – as it has in the past – base its decisions on an inflation forecast.

The fourth quarter of 2008 saw a sharp slowdown in the world economy, which affected all countries simultaneously. There is every reason to believe that the deterioration has continued over the past two months. The Swiss economy is being hit hard by these developments, and they are affecting nearly all sectors of the economy. The export industry is bearing the brunt, however. As a result, the SNB is revising its GDP growth forecast downwards for the year under review. It now expects real GDP to fall by between 2.5% and 3%.

The rapid deterioration in the economic situation and the decline in commodity prices have also led to a clear downward revision of the inflation forecast. Average annual inflation will amount to –0.5% in 2009. With the measures decided today, the SNB is forecasting average annual inflation for the following two years of virtually zero. This inflation outlook calls for decisive action on the part of the SNB. By once again lowering the three-month Libor target range and acting to prevent any further appreciation of the Swiss franc against the euro, the SNB is seeking to counter the risk of deflation and of a dramatic deterioration in the economy.", Swiss National Bank
3/12/2009 8:29:02 AM