SNB Libor Rate Down To 0.50%, As Expected

SNB Libor Rate Actual 0.50%, Expected 0.50%, Previous 1.00%

Release Explanation: Four times per year the Swiss National Bank (SNB) Governing Board meets to set the nation's short term interest rate (i.e., 'three-month libor'). Shortly after the meeting they release a statement that contains the decided rate, a brief commentary of the economic conditions that effected their decision, and most importantly, clues regarding the outcome of future meetings. The decision on where to set interest rates depends mostly on inflation.

The primary objective of the central bank is to achieve price stability; when inflation rises above an annualized rate of approximately 2%, they will respond by raising interest rates in an attempt to bring prices down. A rising trend in interest rates has a positive effect on the nation's currency. Short term rates are the paramount factor in currency valuation; traders look at most other indicators merely to predict how interest rates may change in the future.

Trade Desk Thoughts: The Swiss National Bank has cut the interest rate for the fourth time in the last two months, as the tight credit conditions are affecting the economy. The bank has cut down the Libor Rate down to 0.50%, corresponding to a 0% to 1.00% target range for the 3 months Libor rate. Until now, the bank had cut 225 basis points in order to help the economy. The previous three cuts were conducted in surprise moves, as the Swiss GDP is seen as being negative in 2009.

Some analysts are saying that the central bank is running out of conventional ammunition. The short-term rates for the repurchasing agreements are already at very low levels, leaving almost no room for any further easing policies. As such, the bank might be tempted to approach some new measures, such as buying longer term bonds or reducing the value of the currency.

Interest Rate Statement: The Swiss National Bank (SNB) is lowering the three-month Libor target range by 50 basis points to 0.0-1.0% with immediate effect. It will continue to provide the Swiss franc money market with a generous and flexible supply of liquidity. It will take all necessary steps to gradually bring the Libor down to the middle of the target range.

The global economic environment has sharply deteriorated over the past few months. Economic activity has declined in both the US and Europe, and has slowed considerably in Asia. The situation on international financial markets has worsened further since September. The Swiss economy will be heavily affected by these developments. The SNB projects that GDP growth will be negative next year, between -0.5% and -1%.

The unfavorable economic outlook and the falling oil price have prompted a radical adjustment of the inflation forecast. Inflation will undergo a substantial decline over the course of next year, and will remain low thereafter. Assuming a constant rate of 0.5% for the three-month Libor, the SNB is now forecasting average annual inflation of 0.9% in 2009 and 0.5% in 2010.

The improvement in the inflation outlook has provided room for maneuver which the SNB is decisively using. By further lowering the Libor target range, the SNB aims to reduce the risk of a deterioration in the situation, and thus supporting economic activity.

The SNB will continue to closely monitor developments in the global economy, in financial markets and in foreign exchange markets. It will implement further measures should the situation so require

Forex Technical Reaction: The swissy fell 100 pips overnight, down to TheLFB S1 (1.1915). The pair had a weak reaction to the release, moving less than 15 pips. Against the euro, the swissy lost today 30 pips

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