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Swiss Franc - Swiss National Bank Unexpectedly Cuts Rates by 50bps to 2.00%
Thursday, 06 November 2008 14:04:45 GMT  |  Terri Belkas, Currency Strategist
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Just one minute after the BOE cut rates on Thursday, the Swiss National Bank (SNB) surprisingly came in with a 50 basis point reduction to their 3-month LIBOR target rate, bringing it down to a nearly 2-year low of 2.00 percent.

Since the SNB had not been scheduled to meet again until December, their rate cut indicates that this was part of a coordinated effort with the other European central banks. In a press release following the rate decision, the SNB said that they adjusted monetary policy in light of the worse-than-expected deterioration of the global economic outlook and lower inflation forecasts, given the drop in oil and appreciation of the Swiss franc. Their discussion of the currency, which they will “keep a close watch on”, suggests that they are somewhat concerned about its ascent and if these moves continue, may signal potential for a coordinated currency intervention on low-yielding currencies in coming months. 

Swiss National Bank – Usually, the SNB has the luxury of taking its time in delivering its monetary policy as the three central bankers meet regularly on a quarterly basis. However, the policy authority does stipulate that it can meet anytime to discuss the benchmark lending rate and this has instilled a sense of surprise with unscheduled rate shifts. Though the Swiss announcement comes in the guise of a coordinated European action, its 50 basis point cut still comes as a surprise. As Switzerland’s future is inextricably linked to the health of the Euro Zone, the ECB’s action had more of an impact on the outlook for economic activity going forward. For the franc, the SNB cut seems to have altered its place in the carry trade totem pole. Already an established funding currency for the strategy (for its low benchmark and stability of rates), the easing suggests the policy group will follow suit with the global decline in interest rates and the franc will continue to be a funding currency when risk aversion eventually dries up. With this shift, the franc sold off against most of its counterparts as risk aversion and carry unwinding have been curbed over the past few weeks. BoE_ECB.11.06.img4


Check out our Central Bank Interest Rate Summary for more on the rate cuts implemented by other European central banks on Thursday and its impact on the forex markets.

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