Not All of Them Cut
Written by A Forex View From Afar on Thursday, October 09, 2008After the major central banks decided to cut the overnight interest rate by 50 basis points, we find out today that one of them was not so successful in achieving its objective.
The Swiss National Bank failed today in achieving the intended policy rate of 2.5%. The Swiss central bank, unlike other, tries to influence the Libor rate to control the country’s monetary policy. The logic behind it is that the population/companies/financial institutions access loans at the Libor rate, and by controlling that the SNB has direct control over monetary supply and demands.
However, the Libor rate is a little off these days, simply because banks are not lending to each other right now. As a consequence the 3-month Libor rate increased the SNB targeted rate, and things went higher instead of lower.
The 3-month Libor was fixed at 3.087%, way above the SNB’s target of 2.50%. It is very likely now that in the following days the SNB will flood the market with 3-months repos, in order to drag the Libor rate down. The direct effect of this action will be a cheaper Swiss Franc, which would mean the Usd/Chf is likely to be heading higher.
The same monetary policy the SNB tried to implement has proven to be very useful over the past few years. With the Confidence Crisis now embedded into the financial mind-set the SNB may have their work cut out over the next few days to scramble things together, and in the mean-time we will keep an eye on the swissy moves.
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