SNB Holds Key Rate

The Swiss National Bank left its benchmark interest rate unchanged and said it will continue to take “firm action” to prevent any appreciation of the franc as it battles the threat of deflation.

The central bank, which has cut borrowing costs by 250 basis points since October to combat the financial crisis, said the three-month Libor target will remain at 0.25 percent today. It last cut the rate in March, when it expanded its response to the economic crisis by starting bond purchases and intervening in currency markets on its own for the first time since 1992.

Swiss policy makers are trying to pull the economy out of its worst recession in more than three decades and the government yesterday pledged to increase stimulus spending. Exports have fallen about 17 percent in the past year and unemployment has risen to the highest in more than three years. Consumer prices plunged the most in five decades in May.

While the SNB said it will take firm action to prevent an appreciation of the Swiss franc against the euro,” board member Thomas Jordan said the bank will keep its currency strategy flexible, an approach he said will make it easier to phase the policy out when necessary.

The foreign exchange measures have pushed the franc down by about 1.6 percent against the euro since they began. Prior to the move, it had risen almost 8 percent in six months, neutralizing rate cuts and weighing on exports.

The franc’s strength also lowered prices of imported products, adding to deflationary pressures. The SNB today reiterated that consumer prices will fall 0.5 percent this year. Inflation will average 0.4 percent next year and 0.3 percent in 2011, it said, having previously forecast that inflation will be very close to zero” in both years.

SNB Holds Key Rate, Bloomberg
6/18/2009 8:46:55 AM