SNB: Currency Intervention Are Needed To Revive The Economy

The SNB reduced its main policy by 25 bps today. At the same time, the central bank announced that it would intervene to prevent Swiss franc from intervention so as to restore the country's competitiveness.

The SNB has lowered the target range for the three-month LIBOR by 25 bps, narrowing it to 0-0.75%, and pledged to bring the LIBOR down to the lower end of the new target range (i.e. 0.25%). Over the course of 4Q08, the central bank has cut the LIBOR target range by 225 bps.

Since then, little recovery was seen in the nation's economy. Rather, real GDP contracted 1.2% in annualized terms while unemployment climbed to the highest in more than 2 years. As global economic outlook worsens, the SNB is now forecasting a contraction in GDP of between 2.5% and 3% for this year.

In order to combat the worst recession since 1982, SNB also announced intervention to the currency market. In order to stop Swiss franc from further appreciation, 'it will increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets'.

Concerning inflation, SNB warned that it's highly likely for negative inflation over the coming 3 years. As global economy has deteriorated more rapidly than previously anticipated and commodity prices have remained firmly in downtrend, the SNB revised its inflation forecast downward. The central bank now expects average annual inflation will amount to -0.2% in 2009.