Thursday December 11, 12:01 PM
Switzerland slashes interest rate, sees recession in 2009
ZURICH (AFP) - Switzerland's central bank on Thursday slashed its benchmark interest rate by half a percentage point to a range of zero to 1.0 percent to boost an economy it now expects to be in recession next year.
A sharply deteriorating global economic environment and international financial markets will impact the Swiss economy significantly, it said as it announced the rate cut, its fourth consecutive reduction in three months.
"The Swiss National Bank projects that GDP (gross domestic product) growth will be negative next year, between (minus) 0.5 and (minus) 1.0 percent," the central bank said in a statement.
The key metals, machinery and electronics industry has already seen a sharp fall in new orders, the SNB head said, as the list of victims of the slowdown expands beyond the two major banks UBS (Virt-X: UBSN.VX - news) and Credit Suisse.
Further losses at the two major banks, which have already posted billions of dollars in asset writedowns, also cannot be ruled out, his deputy added.
The slowdown in the US, Europe and emerging markets are impacting Swiss exports, chairman of the SNB governing board Jean-Pierre Roth said.
"The worsening outlook for sales will lead to an adjustment of investment plans in Switzerland as well," he said, adding that the resulting deterioration in business confidence would dampen job creation.
The outlook at the country's two biggest banks UBS and Credit Suisse also looks gloomy.
Vice-chairman of the SNB governing board Philipp Hildebrand said that "further losses cannot be ruled out" at both even though measures taken by the government have had "a positive effect" on the banks' position.
"The situation remains serious and the SNB will continue monitoring it closely together with the Swiss Federal Banking Commission and the Federal Department of Finance," Hildebrand said.
UBS, which has been the among the worst affected and had to take billions of dollars in asset writedowns, was forced to accept a state rescue package worth almost 60 billion dollars in a bid to restore client confidence.
Credit Suisse, Switzerland's second biggest bank, has recently warned of a 3.0 billion Swiss franc loss for the two months ending November.
With oil prices plunging from record highs above 147 dollars in July to around 40 dollars now, the threat posed by inflation has eased substantially.
This allows "room for manoeuvre" in monetary policy, which the SNB said it was using "decisively."
"By further lowering the Libor Target range, the SNB aims to reduce the risk of a deterioration in the situation and thus support economic activity," it said.
Roth also suggested that a further cut could also be made in 2009 as the economy falls into recession.
"We still have margin to manoeuvre, we are not expecting a change in inflation in 2009," he said.
"In 2003, we were at a lower rate than today" with a median rate at 0.25 percent, while that median is now at 0.5 percent, he noted.
Libor -- London Interbank Offered Rate -- is one of the most important benchmarks in the global financial system and is used as a base for many different types of loans over different periods.
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