SNB Unexpectedly Cuts Rates, Says Economy May Shrink

By Elena Logutenkova and Joshua Gallu

Nov. 6 (Bloomberg) -- The Swiss central bank unexpectedly lowered its main lending rate by 50 basis points, joining rate cuts by the Bank of England and the European Central Bank, and said the economy may contract next year.

The central bank, led by Jean-Pierre Roth, lowered its three-month Libor target to 2 percent today from 2.5 percent, the biggest reduction in more than five years, it said in a statement from Zurich. The SNB wasn't scheduled to decide on interest rates until Dec. 11. The BOE cut borrowing costs by 150 basis points and the ECB pared its benchmark by 50 basis points.

``It seems the strong move of the BOE might have been discussed among central banks,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. ``Central banks are trying everything they can to fight the financial crisis.''

Today's action is the SNB's second inter-meeting cut in a month, as the financial market crisis causes stocks to plunge and forces governments to buy troubled assets. UBS AG, Switzerland's biggest bank, got a $59.2 billion aid package Oct. 16 after piling up the biggest losses of any European lender from the global credit crisis.

``The global economic outlook has deteriorated more severely than anticipated, which will impact growth in Switzerland in the next few quarters,'' the bank said. ``The economic slowdown, the decline in the price of oil and the appreciation of the Swiss franc are reinforcing the expected drop in inflation.''

`Extraordinary Measures'

With investors shunning riskier assets and investing in so- called safe-havens, the Swiss franc has jumped more than 5 percent against the euro since Oct. 1. The pace of the franc's appreciation and higher money market rates are a ``big challenge'' for the central bank, Roth said in an interview with the Neue Zuercher Zeitung on Nov. 1.

The franc fell against the dollar after the SNB's announcement, dropping to 1.1730 by 1:59 p.m. from 1.1580 yesterday. It weakened to as much as 1.5072 per euro before reversing losses after the ECB's half-point rate cut.

``Extraordinary times call for extraordinary measures,'' said Reto Huenerwadel, a senior economist at UBS in Zurich. With other central banks acting aggressively, the Swiss franc ``would have gone through the roof'' if the SNB hadn't acted.

The U.S. Federal Reserve last week cut its benchmark to 1 percent from 1.5 percent and signaled it's ready to take rates to the lowest level on record. China and Japan have also reduced rates, and Australia this week slashed borrowing costs by three quarters of a percentage point.

Swiss exports declined for the first time in almost four years in September, manufacturing contracted in October for the second month, and leading indicators slipped to the lowest level in more than five years. With exports drying up and the financial market crisis pounding banks' earnings, Switzerland is seeing two main growth engines falter.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Joshua Gallu in Zurich at jgallu@bloomberg.net