SNB: Repo rate raised

The SNB yesterday hiked the 1-week repo to 2.08% from 2.05% (where it had been since October 4 2007). The key to understanding this move is that the SNB targets 3-month libor, not the 1-week repo, as its main policy rate, notes Citibank in a research note dated January 17, 2008. The target for 3-month libor remains centred on 2.75%, as it has been since last September. In late 2007, the sharp widening in repo-libor spreads obliged the SNB to cut the repo in stages, from 2.43% in early August to 2.05% in late October, in order to try and bring 3-month libor back to 2.75%. The cuts in the repo rate aimed to prevent an undesirable tightening in monetary conditions via the rise in 3-month rates. Now, with repo-libor spreads compressing again in both the Swiss money market and others, 3-month libor had fallen clearly below the 2.75% target in recent days and hence the SNB hiked the repo to prevent 3-month rates falling too much. In other words, the rise in the repo rate aims to prevent an undesired loosening in monetary conditions via a falling 3-month rate.

So, this is not really a rate hike, notes Citigroup. Nevertheless, it is a sign that the SNB does not want to allow 3-month libor to fall well below 2.75%. Going forward, the SNB may well continue to lift the repo rate if repo-libor spreads continue to narrow again. After all, in July last year (pre crisis), the 1-week repo was at 2.43% with 3-month rates around 2.75%.