Central bank cuts rates in bid to strengthen economy

The Swiss National Bank is running out of room for manoeuvre as the base rate approaches zero Keystone Archive

The Central Bank has cut interest rates by half a per cent to try to keep economic growth on track.

Bank spokesman, Christoph Muhlhäuser, told swissinfo that the cut was aimed at “boosting the economic recovery, which has been slower than expected, and offsetting the upward pressure on the franc”.

The Bank also revised downwards its forecast for economic growth saying it was likely to remain well below one per cent for the year as a whole.

The rate cut is the second since May, and brings the three-month London Interbank Offered Range (LIBOR) down to between 0.25 and 1.25 per cent – a historic low. The bank said it would aim to keep the rate in the middle of the new range.

Analysts said the Bank had been under huge pressure to act, but most took the view that the cut would have little effect. The franc dipped slightly against the euro on the news.

UBS economist, Hanspeter Hausherr, pointed out that the cut would seriously limit the Bank’s room for manoeuvre because rates are getting close to zero. “They have used up almost all their ammunition,” he said.

Safe haven

The Bank acknowledged that the franc was being driven up investors seeking a “safe haven”, in the face of huge uncertainty.

“The strengthening of the Swiss franc reflects the sustained economic and political uncertainties, which led to a loss of confidence also on the international stock markets,” the Bank said in a statement.

The interest rate cut was the fifth since September 11 and the start of worldwide economic turbulence. The last cut in early May saw the LIBOR rate lowered 0.75 per cent – 1.75 per cent.

The European Central Bank refused to comment the cut, and would not say whether it intended to follow suit.

Squeezing exporters

The strengthening franc has been steadily squeezing Swiss exporters and is threatening to price them out of the market. The European Union is Switzerland’s biggest market, accounting for 60 per cent of all exports.

Switzerland’s main business association, economiesuisse, welcomed the cut. It said that price stability was not threatened and it therefore made sense to try and help exporters.

However, it added that it saw no reason to revise its predictions for growth. “We have already said we expect growth of at least one per cent this year and we see no reason to change that,” said spokesman Roberto Colonnello.

UBS’s Hausherr said the economy was not likely to fall into recession, despite the Bank’s downbeat prognosis.

Turbulent Week

Switzerland’s blue chip index had a turbulent week dropping to levels not seen in five years but fought back on the rate cut news to end the week up 2.4 per cent at 5,024 points, outperforming other European markets.

The Swiss Market Index (SMI) oscillated in a 15 per cent range during the week but managed to climb above the psychologically important 5,000 mark.

“Having lost so much money, investors are paralysed, they have not sold some of their stocks despite huge losses because they don’t know in which sectors to move,” Marc Faber, a stock market expert, told swissinfo.

Financial and insurance stocks recovered after heavy losses during the week amid concerns about the level of their reserves and over exposure to the stock market.

Zurich Financial rose 11.2 per cent to SFr140, while Swiss Life gained 6.9 per cent closing at SFr217.25.

Both stocks had been battered before reassuring the market about their capital positions on Thursday.

“The Swiss index is heavily weighted by financial stocks and I think that financial stocks will have to go lower in due course,” Faber said.

The rate cut didn’t help the engineering group ABB, which ended a volatile week closing down 16 per cent to SFr7.60, after reporting lower than expected profits this week.

“Investors have been caught ill footed because some people in Switzerland and around the world told them that stocks always go up, which doesn’t correspond with reality,” Faber said.

swissinfo with agencies