SNB cuts interest rates by shock 100 basis points

ZURICH (Reuters) - The Swiss National Bank made a surprise cut in interest rates on Thursday, slashing 100 basis points off its target range for the 3-month Swiss franc LIBOR to 0.50-1.50 percent, sending the franc tumbling.

The SNB said it would provide the Swiss franc money market with a generous and flexible supply of liquidity in order to bring the LIBOR down to the middle of the target range.

"International economic conditions have worsened appreciably, bringing a higher risk of a marked slowdown in economic activity in Switzerland next year," it said in a statement.

The franc fell to its lowest versus the dollar since August last year after the cut, while euro zone government bonds gained and Swiss stocks pared earlier loses. Banks UBS and Credit Suisse had been down sharply before the cut.

"It was quite unexpected, particularly after the more or less unexpected cut in early November," said Violante di Canossa, economist at Credit Suisse in London.

"I wouldn't put a big probability on another cut in December but it's definitely there, especially as the European economy is slowing quite sharply. Bad news is still in the pipeline."

The cut was the third within a month, following a 50 basis point cut earlier in November that came the same day as Bank of England and European Central Bank rate cuts and 25 basis points in October that was coordinated with other central banks.

Markets had been expecting another cut when the SNB meets in December, but the central bank said on Thursday inflation risks had eased sufficiently to allow it to move earlier.

"As a result of the decline in the prices of raw materials and oil, price stability will be restored sooner than expected," the SNB said, adding it expected inflation to fall below 2 percent as early as the end of this year.

Fears about a recession have been mounting as exports are hit by the economic slump in key Swiss markets as well as by the higher franc, while its banks are still struggling with the credit crisis.

The financial sector accounts for nearly 15 percent of the Swiss economy and the country's largest bank UBS has had more writedowns than any other European bank, which forced the government into a major bailout package last month.

(Reporting by Emma Thomasson; Editing by Chris Pizzey)