SNB: Doing All That It Takes

The SNB chose to maintain its "fast easing" pace today by cutting its target for the 3-Month LIBOR by 50 bps from a mid-point of 1.0% to 0.5%. The Swiss central bank is relaxing further its monetary policy even before the full impact of its last decision has been passed to actual rates.

On December 10, the Swiss 3-Month LIBOR still stood 14 bps above the SNB target. However, today's decision can probably be interpreted as a willingness of the SNB to send a strong signal to the markets and the other economic agents.

The SNB has fully taken into account the recent further deterioration in the global economy and its likely impact on the open Swiss economy and has already made it clear that it would be open to resort to "unconventional tools" to restore the transmission mechanisms of monetary policy. The SNB looks set to use all available weapons to support the economy, including “talking down the exchange rate”, for instance by alluding to “intervention on the FX market”.

The Swiss target a market rate, the 3-month CHF Libor. This is not a rate the SNB can directly control and “cut” as they see fit. The SNB's main instrument to steer the 3-month CHF Libor is the overnight repo. The SNB has brought its overnight rate down to close to 0% already. The Swiss national bank announced today that "it will take all necessary steps to gradually bring the Libor down to the middle of the range".

At the press conference, Deputy Governor Jordan gave some details on those “necessary steps”, mentioning the extension of the maturities of the SNB money market transactions, or intervening in “markets other than the money market”. This morning, the SNB offered funds at 0.05% in repos at 3-month and 6-month maturities.

The SNB also decided to help the banking sector further by lowering the cost of the liquidity-shortage financing facility, taking the premium of 200 bps down to 50 bps. Besides, the claims for this facility will no longer be reported separately.

The SNB looks extremely worried about the state of the economy and ready to take very bold measures. It has taken its forecast for GDP growth for 2009 down from “close to 2%” in September” to a mid-point of -0.75% today.

We expect the SNB to maintain its target at 0.50% for a while, focusing instead on liquidity management and, with an increasing probability, to measures of quantitative easing to by-pass the persistently clogged interbank market.

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