SNB May Cut Rates, Opening Door for Other Tools

By Joshua Gallu

March 12 (Bloomberg) -- The Swiss central bank may cut its interest rate to the lowest level since 2004 today, bringing it closer to using unorthodox measures to revive the economy.

The Swiss National Bank will lower its main lending rate to 0.25 percent from 0.5 percent, according to the median of 15 economists in a Bloomberg News survey. That would be on top of the 225 basis points of cuts since early October. The decision is due at 2 p.m. in Zurich and the SNB will release a statement.

Policy makers from London to Washington are reaching for new tools to reverse deepening recessions after cutting rates close to zero. Switzerland is facing its worst slump since 1982 and the central bank says it’s ready to respond by purchasing bonds or intervening in markets to weaken the Swiss franc.

“If the situation deteriorates further, I have no doubt that they won’t hesitate” to embrace new policy measures, said Martin Gueth, an economist at Landesbank Baden-Wuerttemburg in Stuttgart. “Unconventional means are becoming increasingly important.”

A reduction to 0.25 percent would take the SNB’s main rate target to the lowest since the current policy regime started in 2000. The bank targets the three-month Libor rate for francs.

Switzerland’s economy is shrinking faster than the SNB estimated in its last round of forecasts in December, Governing Board member Thomas Jordan said last month. UBS AG, Switzerland’s biggest bank, yesterday posted a 20.9 billion Swiss franc ($18 billion) loss for 2008, more than initially reported, and said it remains “extremely cautious” about the outlook for this year.

New Tools

Other central banks have already started implementing new policy tools to reverse deepening recessions after exhausting conventional measures. The Bank of England is printing money to buy government bonds in a bid to ward off deflation. The U.S. Federal Reserve is buying assets and the Bank of Japan earlier this month bought corporate bonds from lenders for the first time.

“The SNB is certainly next in line for such moves,” said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. “The SNB probably needs to do more. It’s game over for conventional monetary policy.”

SNB Vice-President Philipp Hildebrand said Jan. 21 the central bank could intervene in currency markets at fixed exchange rates if necessary to prevent a renewed appreciation of the franc.

Franc Gains

The Swiss currency has gained more than 8 percent in the past six months against the euro, adding to companies’ pains by making their products less competitive in the 16-nation euro region, which accounts for more than half of Swiss exports. The franc rose 0.1 percent to 1.4785 per euro as of 8:52 a.m. in Zurich. Against the dollar, it was 0.4 percent lower at 1.1575.

Sika AG, Europe’s biggest maker of chemicals used in construction, said last month that fourth-quarter sales fell 6.5 percent, hurt by the franc’s appreciation and weaker demand from the construction and auto industry. Currency moves helped prompt Syngenta AG, the world’s biggest maker of pesticides, to cut its 2009 profit target.

“Foreign exchange intervention is a distinct possibility,” Poser said. “You could alleviate some of the pressure on exporters and reduce the probability of imported deflation.”

Price pressures have evaporated in recent months after the cost of oil dropped around 70 percent from its July record, the franc surged and domestic demand weakened. Swiss inflation may be negative for “a couple quarters” and a prolonged period of price declines “cannot be excluded,” SNB chief economist Ulrich Kohli said this week.

Swiss leading indicators dropped to a record low last month as manufacturing shrank at the fastest pace since at least 1995.

“Inflation is low, the franc is strong and the economy is in recession,” said Ralf Wiedenmann, chief economist at Vontobel Asset Management Ltd. in Zurich. “If lower interest rates aren’t enough, they’ll take other measures.”

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