By Joshua Gallu
Nov. 20 (Bloomberg) -- Switzerland's central bank lowered its benchmark interest rate by an unprecedented percentage point after the economic growth outlook worsened.
The Swiss National Bank reduced its target for the three- month Libor to 1 percent and promised a ``generous and flexible'' supply of Swiss francs. It's the third unscheduled move by the SNB since the beginning of October. Today's step is the biggest single cut the Zurich-based SNB has made since it began targeting the three-month Libor in 2000.
``It's a huge step and a big surprise,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London. ``The global financial environment has considerably worsened over the past days. They'll probably keep rates on hold next month given the extent of today's step.''
The SNB gained room to act after pushing the three-month range for borrowing francs, or Libor, back within its target this week for the first time in two months. The SNB predicted inflation will fall below 2 percent as soon as this year, giving it room to lower interest rates to counter a possible recession.
``To cut rates by that much in one go begs the question whether there's something we don't know,'' said Kenneth Broux, an economist at Lloyds TSB Group Plc in London.
After the announcement, the SNB offered 3-month and 6-month funding at 0.15 percent.
World Worsening
``International economic conditions have worsened appreciably, bringing a higher risk of a marked slowdown in economic activity in Switzerland next year,'' the statement said. ``The SNB will continue to monitor closely the situation on the money and foreign exchange markets.''
The International Monetary Fund predicts advanced economies including the U.S. and euro area will contract simultaneously next year for the first time since World War II. Federal Reserve Chairman Ben S. Bernanke, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet have all signaled they're ready to cut interest rates further to stem the deepening economic slump.
``From the ECB perspective, the SNB surprise move, adds to the evidence suggesting that it is likely to lower its policy rate by 75 basis points at the Dec. 4 meeting,'' Julian Callow, chief European economist at Barclays Capital Plc in London, said in a research note.
Exports Drop
Swiss exports fell 4.6 percent from the previous month in October as a global economic slowdown eroded demand for machines, chemicals and metals, the Federal Customs Office said today. Foreign sales of textile machinery dropped 46 percent from a year earlier.
Today's decision helps damp that decline, according to Janwillem Acket, chief economist at Bank Julius Baer. `` You help exporters by taking stress out of the exchange rate. It's a sensible forceful action.''
The Swiss franc fell to its lowest level against the dollar since August 2007 after the announcement and dropped 0.8 percent to a one-month low of 1.5287 against the euro.
The euro-region, which buys more than half of Swiss exports, is in a recession for the first time since the single currency was introduced a decade ago and the head of the U.S. National Bureau of Economic Research, Robert Hall, said this month that the U.S. is also contracting.
Switzerland's benchmark SMI share index has lost 38 percent since the beginning of the year, including 15 percent since the beginning of this month. Shares of UBS AG, the Zurich-based European bank with the largest losses from the global credit crisis, dropped as much as 11 percent to 10.73 francs today.
``Monetary policy is the only instrument that can help the banking sector,'' said Sylvain Broyer, an economist at Natixis in Frankfurt. ``Should equity markets not recover, further rate cuts are not excluded.''
The SNB is scheduled to hold its next regular monetary policy meeting on Dec. 11. The central bank has cut rates by a total of 175 basis points since Oct. 8.
To contact the reporter on this story: Joshua Gallu in Zurich at jgallu@bloomberg.net
Posts
No comments:
Post a Comment