The Swiss National Bank made a surprise full percentage point cut in interest rates on Thursday, trying to stave off a recession as the global outlook worsens fast, and other central banks are seen following suit.
In a third cut in six weeks, the SNB lowered its target band for the 3-month Swiss franc LIBOR to 0.50-1.50 percent from a previous 1.50-2.50 percent range. The central bank would provide generous liquidity to bring the LIBOR rate down to the mid-point of the new range, or 1.00 percent, it added.
"International economic conditions have worsened appreciably, bringing a higher risk of a marked slowdown in economic activity in Switzerland next year," the SNB said in a statement.
Thursday's cut, announced three weeks before a regular quarterly review, takes Swiss rates to their lowest level since March 2006 and is the biggest reduction since the SNB switched to a target band system in 2000.
The Swiss franc fell to its lowest level against the dollar since August 2007 after the cut. Swiss shares pared losses, although they later traded deep in the red again along with global stocks after a jump in U.S. jobless claims. "This is completely unexpected," said Sarasin economist Jan Poser. "Such a bold move sometimes also looks like a panic move … but with markets now in panic mode, the SNB probably thought they would not exacerbate the situation."
Economic statistics in recent days have added to the case for monetary easing, including data which showed Swiss exports fell sharply in October, retail sales slowed in September and input price inflation eased in October. The move followed a 50 basis point cut on Nov. 6 — the same day as the Bank of England and European Central Bank lowered rates — and a 25 basis point reduction on Oct. 8 which was coordinated with other central banks and was the SNB's first easing in five years.
PRO-ACTIVE CENTRAL BANKS
Analysts said the SNB move could herald similar action by the ECB at its meeting on Dec. 4 or even earlier, and the BoE.
"This move confirms a highly pro-active/aggressive central banking community and there will be more to come from the BoE and the ECB soon," said Audrey Childe-Freeman, senior currency strategist at Brown Brothers Harriman.
Fears about a Swiss recession have been mounting as exports are hit by the global economic trouble and by the higher franc, while its banking sector — which accounts for nearly 15 percent of the Swiss economy — is struggling with the credit crisis.
The SNB expressed concern about the franc after it hit an all-time high against the euro on Oct. 27 at 1.4301, as financial turmoil lifted the traditional safe haven currency, adding an extra burden to the slowing export-dependent economy.
The franc dipped after the cut to 1.5281 per euro at 1453 GMT, but analysts said risk aversion could soon push the currency back up if share markets continue to tumble.
The SNB currently forecasts growth this year of 1.5-2.0 percent, but has warned that the economy could shrink in 2009.
Switzerland's largest bank, UBS, has made more writedowns than any other European bank, forcing the government into a major bailout package last month.
Shares in UBS briefly stemmed losses after the rate cut, but they were trading 10 percent lower at 10.83 Swiss francs, moving back towards the all-time low of 10.73 francs touched earlier in the day. Credit Suisse tumbled 11 percent.
