ZURICH (Reuters) - Following are comments from economists after 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.
The cut was the third within a month and came as the SNB said there was a higher risk of a marked slowdown in economic activity in Switzerland next year.
“We had expected them to cut to 0.5 percent but not before Q3 2009. This is completely unexpected. Its a bold move that the SNB must have deemed necessary.
“Their risk scenario must have become reality. At the last cut, they warned that there could be negative growth in 2009. This has probably become their best case scenario.
“They probably also thought why wait?
“Such a bold move sometimes also looks like a panic move and the SNB would want to avoid being perceived as being panicky but with markets now in panic mode, the SNB probably thought they would not exacerbate the situation and don’t see a reason for waiting.”
NEIL MELLOR, CURRENCY STRATEGIST, BANK OF NEW YORK MELLON, LONDON
“I think we’ve gotten to the point where central banks have to entertain these types of measures. (But) there is growing doubt whether monetary policy can work in a debt deleveraging environment. And there are doubts whether fiscal policy can work in this environment.”
“There’s no confidence that any of these measures are going to work.”
“The knee-jerk reaction has been to sell the Swissy for all the usual reasons, like declining yield.
“But if you step back, risk averion has enveloped the market again ... so the euro could fall again and the Swissie could rise.”
“The SNB’s decision to cut interest rates by 100 basis points was surprising both in terms of its timing and its aggressiveness.
“Nevertheless it is well in keeping with the recent heightened tensions on the global financial markets,” he said.
“The SNB has now very little room to maneuver left. At least they won’t cut rates in December,” he added.
“This now puts Swiss rates at 1.00%, on par with the Fed Funds rate and shows the SNB is clearly concerned over current economic conditions. The SNB also pledged to monitor FX markets, likely alluding to the sharp drop in EUR/CHF during October’s risk-aversion episodes, which would seriously damage the export-dependent economy.”
“This move clearly signals that the SNB are concerned about deflationary risks. This joins them with the Fed and BoE who have also expressed similar concerns in recent weeks. “While the immediate impact of this move will be toward CHF weakness, the resultant ‘what do they know we don’t know?’ may see equity markets sell off further today, resulting in EUR/CHF giving up its initial bounce.
“With Switzerland originally considered as one of the better-placed economies amid the current crisis, uncertainty would only add to market woes and continue to support safe-havens, consistent with our current views.”
“This surprise SNB move means that their view of the economic outlook is grim and because it is so close to market forces in the neighboring euro zone, looks set to result in ECB rates being cut by 100 basis points, either at the December meeting or earlier in an inter-meeting decision.”
“The SNB’s shock 100 bps rate cut follows on from a series of dismal figures released for the Swiss economy that for example saw exports, Switzerland’s traditional growth engine, contract by 7.8 percent in October.
“The SNB have also recently expressed concerns over the strength of the franc, while also stressing the SNB’s main priority being getting the 3 month franc Libor down to target.
“Given that inflation is no longer seen as a threat and the SNB did not shy away from easing down to a range of 0.00-0.7 percent during their last easing cycle in 2003, we are likely to see SNB ease further in coming months.”
VIOLANTE DI CANOSSA, ECONOMIST AT CREDIT SUISSE IN LONDON:
“It was quite unexpected, particularly after the more or less unexpected cut in early November.
Given how aggressive it (the SNB) has been in dealing with the situation we could expect something more in December — another small adjustment can’t be completely ruled out.
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.
Given the fast rate at which oil prices and raw materials are falling .... the inflation outlook will change again and could open up (the possibility of another cut).”
“The announcement was a bit of a surprise to the market as you can see by the reaction in the Swiss franc. The Swiss economy has seen some unwanted effective monetary tightening as the strengthening of the Swiss franc has offset rate cuts. This is done to take some of the steam out of that and offset the (currency) strengthening.”