SNB Slashed Policy Rate To 0.5%, Possibly The First European Nation To Adopt ZIRP

The SNB cut the 3-month Libor by 50 bps to 0.5%, bringing it to the lowest level since 2004. Over the past 3 months, the central bank has already slashed interest rate by 225 bps but from the accompanying statement, more cuts will be coming.

According to the statement, Switzerland's economy is seriously affected by global downturn and the SNB will 'take all necessary steps to gradually bring the Libor down to the middle of the target range'.  Moreover, the central bank said it will continue to 'provide the Swiss franc money market with a generous and flexible supply of liquidity'.

Concerning economic outlook, the SNB forecasts the nation's economy to contract -0.5 to -1% in 2009 while annual average inflation will fall to 0.9% in 2009 and 0.5% in 2010.

As economic growth has been deteriorating and inflationary pressure in Switzerland has been easing very quickly, we expect SNB's monetary policy will remain 'expansionary' going into 2009. However, as policy rate is approaching zero, it's very likely for the central bank to adopt other measures (e.g. quantitative easing policy such as buying debt securities) in stimulating growth.