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FACTBOX-SNB's options with interest rates close to zero

Published 03/12/2009, 05:54 AM
Updated 03/12/2009, 05:56 AM
TGT
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March 12 (Reuters) - The Swiss National Bank is expected to cut interest rates to a historical low on Thursday and economists are hope for clues on its plans to get the country through the worst recession in decades as rates near zero.

The SNB has slashed its target for the 3-month Swiss franc LIBOR to 0.5 percent and analysts see the SNB cutting it to the low of 0.25 percent reached in the 2003 recession.

SNB vice-chairman Philipp Hildebrand also laid out the central bank's options beyond interest rates in a speech on Jan. 21. (For highlights from the speech click on: [ID:nLL708189])

Following is an overview of the SNB's options beyond rates:

SNB STATUTES

The SNB usually steers rates by offering 1-week Swiss franc funding at its daily repo against high-quality collateral.

The SNB's statutes allow the use of currency interventions, foreign exchange swaps and the creation, sale and purchase of derivatives on receivables, securities, precious metals and currencies as instruments for monetary policy.

The SNB may also buy and sell franc-denominated securities for monetary policy purposes "in order to influence long-term interest rates in exceptional situations".

(For the SNB's guidelines on policy instruments click on: www.snb.ch/en/mmr/reference/snb_legal_geldpol_instr/source/snb_legal_geldpol_instr.en.pdf)

WEAKENING THE SWISS FRANC:

Vice-chairman Hildebrand said the SNB could sell Swiss francs against other currencies without limits to stem an appreciation or even weaken the currency.

In an extreme case, it could commit itself to buying foreign currencies at a fixed rate, de facto turning to foreign exchange rate targeting as the central bank did in the late 1970s.

Many economists see a weakening of the franc as the most likely way to ease conditions in the small, open economy.

Some analysts point out that verbal interventions alone could do the trick, given the SNB's credibility.[ID:nLQ365776]

SNB board members could think aloud frequently about using the exchange rate to ease conditions, an approach the SNB used in 2003/2004 to stem the franc's rise when rates were near zero.

A research paper on the SNB's communications in 2003 and 2004, published by the SNB last year, found that this communication actually helped to bring the franc down.

(For the full paper click on: www.snb.ch/n/mmr/reference/working_paper_2007_12/source/working_paper_2007_12.n.pdf)

BUYING BONDS

Hildebrand also said the central bank could start buying bonds to put pressure on longer-term interest rates.

The volume of Swiss government bonds was relatively small and therefore a relatively small amount could already lead to lower yields.

The SNB could also try to influence costs for private borrowers on the Swiss market directly by buying longer-term company bonds.

ADDING LIQUIDITY

The SNB could also ease conditions by providing more liquidity to banks than needed to keep the rate at zero.

Hildebrand said the SNB could continue to offer longer-term liquidity in its repo operations and even extend the maturity of offerings further.

STEERING EXPECTATIONS:

Analysts said the SNB could try to bring longer-term interest rates lower by steering market expectations on the policy path.

The SNB could communicate regularly its commitment to keep policy rates close to zero for a longer period than was previously expected, possibly providing a commitment.

(Reporting by Sven Egenter; editing by David Stamp)

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