SNB May Keep Interest Rate Unchanged, Maintain Asset Purchases

By Klaus Wille

June 18 (Bloomberg) -- The Swiss National Bank may keep its benchmark interest rate unchanged today as it gauges the impact of record low borrowing costs and its program of currency and bond purchases on the economy.

The central bank will leave the three-month Libor target at 0.25 percent at 9:30 a.m. in Bern today, said all 21 economists in a Bloomberg survey. The SNB in March embarked on its first solo intervention in currency markets since 1992 to put a lid on the franc’s exchange rates.

“I expect the SNB to stay its course of expansive monetary policy,” said David Marmet, an economist at Zuercher Kantonalbank in Zurich. “As we are seeing tentative signs of economic stabilization, the SNB can wait and see how their last quarter’s exceptional measures work.”

The SNB has cut borrowing costs by 250 basis points since October and expects the economy to contract the most since 1975 this year as the global slump hurts its biggest banks and dents exports. The SNB’s currency purchases have pushed the franc down by 1.7 percent against the euro since they began on March 12.

Prior to the move, the franc had risen almost 8 percent in six months, neutralizing rate cuts and hurting foreign exports. Foreign sales account for more than half of gross domestic product.

The SNB may assess the success of asset purchases at a press conference at 10:00 a.m. in Bern. SNB Vice Chairman Philipp Hildebrand, who takes over as head of the central bank in January, said in April that “you have to have patience to let the medicine work.”

Deflation

The franc was at 1.5054 per euro late yesterday compared with 1.4802 on March 11. Bank Sarasin & Co Ltd. said on June 16 that the currency will not strengthen past 1.50 per euro because of concern the SNB will act to check any appreciation.

The franc’s strength also lowered prices of imported products, adding to deflationary pressures. Swiss consumer prices dropped an annual 1 percent in May, the most in five decades. The SNB forecasts that prices may fall an average 0.5 percent this year and remain around zero in 2010 and 2011.

SNB Chairman Jean-Pierre Roth said last month that a further appreciation of the franc “builds the danger of a prolonged deflationary dynamic.”

The central bank will also release its latest economic and inflation forecasts. The economy shrank at the fastest pace in 15 years in the first quarter and the SNB expects it to contract as much as 3 percent this year.

Libor

With financial services accounting for about 12 percent of GDP, Switzerland is more vulnerable to the global credit crisis than some others. Zurich-based UBS AG, the European bank with the largest losses from the financial turmoil, has announced job cuts equal to almost 20 percent of its workforce.

Banks are still lending at a higher rate than the SNB wants, money markets suggest. The spread between the SNB target rate and the three-month Libor rate averaged 15.1 basis points since the central bank’s decision in March.

“The fact that the Libor rate is still above the target rate still shows banks’ reluctance to lend money,” said Daniel Kalt, senior economist at UBS in Zurich. “They still require a risk premium when lending. We are not yet back at pre-crisis modes of market functioning.”

Some economists have downplayed the threat of falling prices. Jan Amrit Poser, chief economist at Bank Sarasin, said the economy may only experience “benign” deflation due to falling oil prices rather than a “typical” scenario where consumers anticipate a prolonged period of declines and postpone purchases. While the cost of crude has jumped 75 percent since February, it’s still down nearly 50 percent in the past year.

Deepest Recession

The global economy is nevertheless showing signs that the worst of the deepest recession since World War II has passed. Switzerland’s manufacturing industry contracted at the slowest pace in seven months in May, while similar gauges in the euro area and the U.S. also improved.

While that means the next challenge for officials may be timing the reversal of expansionary policies, Group of Eight finance ministers said at the weekend that governments and central banks shouldn’t withdraw their stimulus too soon.

John Lipsky, first deputy managing director at the International Monetary Fund, said on June 15 that risks to the global economy are still “real and significant.”

To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net.