(RTTNews) - Springing yet another surprise, the Swiss central bank reduced its key interest rate massively in an unexpected move, as growth as well as inflation slows.

Thursday, the Swiss National Bank lowered its target range for the three-month Libor by a record 100 basis points to 0.5%-1.5% in its third unscheduled move since the start of October. This translates into reducing the interest rate to 1% from 2%. This is the second interest rate cut in November.

“It will provide the Swiss franc money market with a generous and flexible supply of liquidity in order to bring the Libor down to the middle of the target range”, the SNB said.

On November 6, the central bank had reduced the base rate by 50 basis points to 2%, which was the second rate cut in a span of one month. It was the biggest reduction since March 2003. The move was out of schedule and coincided with the massive 150 basis points rate cut announcement by the Bank of England. The same day, the European Central Bank also slashed interest rates by 50 basis points.

In a coordinated move, the SNB, the Bank of Canada, the European Central Bank, the US Federal Reserve, the Sveriges Riksbank and the Bank of England had slashed their key interest rate on October 8. Accordingly, the SNB had lowered the target range to 2%-3% from 2.5%-3%, effectively lowering the rate by 25 basis points to 2.5%.

The central bank was not scheduled to announce a rate decision until December.

“By lowering the Libor target range by 100 basis points, the SNB is making use of its room for manoeuvre”, the central bank said.

The biggest rate cut since the central bank adopted the three-month Libor target in 2000, took the Swiss franc lower. The Swiss franc dropped to its lowest level versus the US dollar since August 2007.

The central bank expects inflation to ease in coming months due to declining prices of raw materials and oil. Hoping to restore price stability sooner than expected, the SNB said inflation is likely to fall below 2% as early as the end of this year.

In October, Swiss consumer prices rose at a slower pace of 2.6% year-on-year compared with 2.9% rise in September.

“Moreover, international economic conditions have worsened appreciably, bringing a higher risk of a marked slowdown in economic activity in Switzerland next year”, the central bank noted.

The SNB said it will continue to monitor closely the situation on the money and foreign exchange markets.

Recently, the think tank KOF projected sharp downturn in Swiss economic activity and forecast GDP growth at just 0.3% next year. However, it expects the current downturn to be less pronounced and considerably shorter-lived. The situation is predicted to improve after the first quarter of 2009.

Switzerland’s exports fell for the first time since 2005 in September as weakness in overseas economies lowered demand for Swiss products. Data released on Thursday showed that the Swiss trade surplus rose to CHF1.83 billion in October from CHF1.46 billion in September, despite a fall in exports. Economists at UBS Wealth Management Research expect the trade balance to narrow, going forward.

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Posted in Categories: Canada, Economy, Eurozone, Forex, Releases, Switzerland, UK, USA.

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