Swiss Central Bank Cuts Rate to 0.5%, Recession Looms

By Joshua Gallu

Dec. 11 (Bloomberg) -- The Swiss central bank cut its interest rate to a four-year low today and said it will do everything needed to ease tensions in money markets as the economy edges closer to a recession.

The Swiss National Bank’s Governing Board in Zurich, led by Jean-Pierre Roth, lowered the three-month Libor target by 50 basis points to 0.5 percent, matching the median of 18 estimates in a Bloomberg News survey. The rate for borrowing francs for three months in London, or Libor, was at 1.14 percent yesterday.

The SNB “will take all necessary steps to gradually bring the Libor down to the middle of the target range,” the central bank said in a statement. “The Swiss economy will be heavily affected” by slowing global growth and market turmoil.

The SNB decision takes it closer to being the first central bank in Europe to reduce its benchmark rate to zero as the financial crisis tips the Swiss economy into a recession. As policy makers run out of room to reduce the key rate, Roth may need to follow the U.S. Federal Reserve and announce new tools to keep the economy on track.

“The SNB can use other unorthodox measures for policy, so there’s not much point in keeping the powder dry,” said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. “Even at the zero bound you can intervene.”

The SNB now expects the Swiss economy to contract between 0.5 percent and 1 percent next year. Roth and Governing Board members Philipp Hildebrand and Thomas Jordan hold a press conference at 10 a.m. Zurich time to explain the decision. The SNB has already flooded markets with francs to ease market tensions.

The central bank “will continue to provide the Swiss franc money market with a generous and flexible supply of liquidity,” the SNB said. “It will implement further measures should the situation so require.”

Possible additional steps for the SNB include selling the franc to boost the allure of exports, buying bonds to keep rates low “for a long time” or flooding the banking system with excess reserves, Poser said.

To contact the reporter on this story: Joshua Gallu in Zurich jgallu@bloomberg.net