Swiss National Bank Cuts 50bp as Policymakers Lower Forecasts for Growth and Inflation

The SNB has cut its target range for the 3 months Libor by 50 bps to 0.00-1.00%. The move was widely expected and brings the mid point of the range to just 0.5%, very close to zero. The central bank has reacted swiftly and decisively to the threat of a protracted economy slowdown and we could well see rates go down to zero next year and the SNB resorting to quantitative easing. In addition, The SNB in its monetary policy assessment said the central bank will continue to provide the CHF money market with a generous and flexible to supply of liquidity and take all necessary steps to gradually bring the Libor down to the middle of the target range. The bank said the global economic outlook has sharply deteriorated over the past few months with economic activity declining in both the U.S. and Europe and slowing down considerably in Asia. At the same time the situation on international financial markets has worsed further and the SNB now predicts Swiss economic growth of -0.5% and -1.0% in 2009 and 2010 respectively. Average inflation is seen at 0.9% next year and 0.5% in 2010. This "improvement in the inflation outlook has provided room for maneuver, which the SNB is decisively using". The bank said the renewed cut in the Libor target range is aimed at reducing the risk of a deterioration in the situation and thus "supporting economic activity" and that it will "implement further measures should the situation so require".

Meanwhile, Swiss Franc (CHF) dipped after SNB cut rates by 50 bp, which was widely expected, leaving the 3-month Libor target rate at 0.00-1.00%. The SNB cited deterioration in the intonation environment, citing a decline in the U.S. and European economies, which are strongly impacting the Swiss economy. EUR/CHF is expected to push above 1.5650, although offers expected to be heavily congested around this area, given that the 100-day moving average lies at 1.5640. USD/CHF has found a modicum of support from 1.1900 since the SNB decision, but risk is on the downside for this pairing, with the technical changing working against the dollar amid the losses seen over the last few sessions. Nevertheless, equity markets are likely to driven sentiment, with technical studies lacking reliability in the current choppy trading environment.

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