In one fell swoop the Swiss National Bank announced arguably the most aggressive round of monetary easing that any of the central banks have been able to muster since the currency financial and economic crisis began back in the summer of 2007.
For its regularly scheduled, quarterly interest rate decision, the central bank announced it had lowered its benchmark lending rate once step closer to zero, was planning to purchase Swiss franc bonds and was prepared to intervene on the currency market to prevent further appreciation in the nation’s currency.
[B]Rate Cuts and Outlook[/B]
Back on its quarterly pace of monetary policy meetings, the Swiss monetary policy authority maintained its steady pace of easing by first lowering the target on the benchmark, three month LIBOR rate from an average of 0.50 percent (0.00 – 1.00 percent) down to 0.25 percent (0.00 – 0.75 percent). This is the lowest level for this rate in at least 10 years. Ultimately though, this decision falls in line with the pace the Federal Reserve, Bank of Japan and Bank of England among others have already set. What is unusual though is that the economic data that has been released from Switzerland is no where as dire as that seen in the US, Japan or UK. However, the group’s projections suggest conditions will deteriorate significantly with time and that recent data is already tipping the economy into a significant recession.
In the statement that followed the rate decision, the policy group offered a bleak outlook for activity. In response to the fourth quarter 0.3 percent decline in GDP, the group said the reading was much worse than they had expected. In fact, high inventory numbers were labeled an artificial booster to the already negative report. What’s more, conditions through the first two months of this year were said to mark an acceleration in the slump – confirming a record low in the leading economic indicators composite report. Forecasts set the bar even lower. While officials suggested growth may return some time in 2010, a projected 2.5 to 3.0 percent plunge in economic activity this year would put the European economy in its worst recession in decades. Supporting such dour expectations were forecasts for unemployment to rise, consumer spending to plunge and exports to suffer from a lack of foreign demand as well as an oppressively high exchange rate.
[B]Extraordinary Efforts[/B]
As an economy that is highly dependent upon exports and its banking industry, a world-wide recession and ongoing financial crisis have finally prompted the Swiss central bank to take extraordinary steps to stabilize its position in rough global seas. In addition to lowering its target lending rate, the SNB announced plans to buy Swiss corporate debt and foreign currencies. Purchasing private debt has been a measure that many other policy authorities have already pursued. This is a reasonable step as lending conditions in Switzerland begin continue to contract with firms like UBS importing the financial crisis from the broader economy. Far more unexpected was the announcement that the central bank would purchase foreign currency to limit the appreciation of the Swiss franc against the euro. This is the first effort at intervention for Swiss policy makers since 1992 and follows a string of unsuccessful attempts at influencing exchange rates by other central banks recently (including the Bank of Japan and Reserve Bank of New Zealand).
Though Switzerland is a small economy, its central bank is deeply liquid. Therefore, when the market learned the group’s intentions to intervene, there was little doubt from market participants that they could use their reserves to genuinely influence the market. In response to the intervention announcement, rate decision and plans to purchase private debt the Swiss sold off aggressively against all its major counterparts. Needless to say, with the statement specifically stating a need to limit the appreciation of the franc against the euro, EURCHF showed the most violent reaction with a 470 point rally in 20 minutes – the biggest rally in this pair since the euro’s inception back in 1999. The US dollar would see a comparable rally against its Swiss counterpart on the news as one of the market’s primary safe havens and on speculation that the central bank would purchase greenbacks to further accumulate gold for its reserves.
