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The Swiss National Bank Interest Rate Decision

Written by A Forex View From Afar on Tuesday, September 16, 2008

The Swiss National Bank is expected to leave the Libor rate unchanged at 2.75% on Thursday. However, analyst opinions vary over what the bank will do over the longer term, with some expecting a cut, while others expect no change.

Unlike other central banks, the SNB influences the 3-month Swiss Franc LIBOR rate to implement its monetary policy. The London Interbank Offered Rate (or LIBOR) is the rate at which banks offer to lend unsecured funds to other banks in the money market. The SNB reviews its monetary policy at quarterly monetary assessments.

The latest report from Switzerland points out that the economy remains resilient to the global slowdown, to some extent. Furthermore, the economy is starting to give signs of deflation, now that oil is dropping.

In July and August 2008, the CPI showed price pressures are easing after inflation in Switzerland reached 3.1% year-over-year, the highest rate recorded in the last decade. Since 1996, the Swiss business environment has been characterized by a low inflation environment, averaging under 1% on an annual basis.

On Monday, a release indicated that the PPI slowed to 4.0% year-over-year from a 19-year high seen in July, just one month earlier. An important part of the inflationist pressure seen in the CPI and PPI was blamed on high-energy costs.

A further reason why the bank should keep rates on hold is that the Swiss economy seems to have withstood the credit crunch, even though the financial sector has the biggest percentage of the Swiss GDP in the world. First quarter GDP advanced 0.3%, while in the second quarter the economy grew by 0.4%. The Swiss unemployment rate is currently at 2.5%, showing an exceptional labor market that is a characteristic of a strong economy.

Against such a background, most analysts and economists expect the bank to hold rates at the current 2.75%, for the fourth time in a row.

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