Central bank slashes interest rates

The Swiss National Bank is hoping to counter the strong value of the franc with its rate cut Keystone

The Swiss National Bank (SNB) took the markets by surprise on Thursday with a larger than expected interest rate cut, aimed at bringing down the value of the franc.

The Bank lopped half a percentage point off its key short-term interest rate, effectively pushing rates down to just a quarter of one per cent.

The cut came just after the European Central Bank reduced its rates by 0.25 per cent, and earned the Swiss bank plaudits for its bold move.

“The ECB cut was less than hoped for,” Hilary Cook, an analyst at Barclays in London, told swissinfo. “The Swiss cut, by contrast, was a much more sensible reaction to very tough economic conditions at present.”

The SNB Chairman, Jean-Pierre Roth, cited Switzerland’s weak economic outlook for the surprise cut.

“The economic outlook is [now] worse than we thought in December and the recovery will likely come later than expected,” Roth said.

The Central Bank’s move takes its three-month London Interbank Offered Rate target to 0.0 to 0.75 per cent from 0.25-1.25 per cent previously. The SNB said it is aiming for the lower end of the scale, at around one quarter of a point.

Unions and business leaders welcomed the rate cut, saying that the SNB’s decision could help kickstart the economy, particularly the export industry.

Safe haven

The cut was aimed at bringing down the value of the franc, which has risen to five-year highs against the dollar, in part of because of a weak US economy, and because the franc – like gold – is traditionally seen as a safe haven in times of uncertainty.

But the move had little immediate effect on the franc, which fell slightly after the cut was announced but returned to its high level against both the dollar and the euro on Friday.

“It’s remarkably difficult to predict where currencies will go,” said Cook. “Cutting the rate should lead to a lower Swiss franc… [but] the problem for the SNB is that in these troubled times, everybody wants Swiss francs.

“They’ve taken the prudent measure, but that’s all they could really do.”

Werner Abegg, SNB spokesman, said: “We wanted to give a clear signal to the markets that we don’t want a further strengthening of the franc.”

He added that the decision took the European move into account, but that the Swiss bank had acted on the basis of its own analysis and thought a quarter percent cut would have sent too weak a signal.

Exporters hit

The strong franc has hit Swiss exporters hard, forcing them to lower their prices in order to remain competitive in already depressed overseas markets. Tourism operators are also thought to be suffering.

“The strength of the franc has made it difficult for Swiss exporters, so the rate cut can be seen as a way of helping them,” Cook added.

With the bottom rate now at zero, the SNB’s room for manoeuvre is limited. However, the bank insisted on Thursday that it still had instruments at its disposal to fight the strength of the franc.

Spokesman Werner Abegg was quoted as saying that the Bank could use money market liquidity, foreign exchange markets and long-term interest rates to affect the value of the franc.

Analysts say, though, that short-term interest rates are the Bank’s main tool in influencing the economy.

“With the interest rate below one per cent, there is a limit to how much can be done,” Hilary Cook told swissinfo. “But rates can go down to zero per cent, as was the case in Japan, although we must hope this cut will have the desired effect.”

The rate cut comes after a string of bad results from some of Switzerland’s best-known companies – Roche, Credit Suisse and Zurich Financial Services – have announced record losses and job cuts, while growth rates have plunged to the lowest for nine years.

swissinfo, Scott Capper

Key facts

Swiss National Bank LIBOR down to 0.0-0.75 per cent from 0.25-1.25 per cent.
Key European Central Bank rate set at 2.5 per cent, down 0.25 points.