SNB Cut Interest Rate and Dollar Weakens on Auto Bailout Uncertainty

12-11-2008 14:34

Swiss National Bank (SNB) cut its benchmark interest rate to 0.5 percent today. The 50 basis points reduction was in line with analysts' estimates. The bank sees improvement in inflation outlook and expects 0.5 to 1.0 percent negative growth for the next year. SNB has been aggressive in easing monetary policy and it may be the first central bank in Europe with zero interest rate should it continue to cut rate further.

Rate Cuts to Boosts Exports

Exports make more than 50 percent of gross domestic product of Switzerland. Cutting interest rates tends to weaken the currency which could help exports to rise by making them cheaper for foreigners.

As interest rates come close to zero policymakers may be forced to use other methods to stimulate the economy and prevent the recession to be prolonged. The central bank's options could be direct intervention - selling the franc to encourage exports - or buying bonds to inject money directly into the system and keeping interest rates low.

Dollar and Auto-Bailout

U.S. dollar weakened against the Euro and the Japanese Yen as uncertainties rose about the future of automakers. Dollar was also weaker against the Swiss franc in Asian markets despite speculations about SNB rate cut.

The House of Representatives finally voted last night to give a rescue loan to the troubled auto industry. However, it still needs the Senate passage where more Republicans are expected to vote against it and even Democrats may be not unified.

General Motors, Chrysler, and Ford, the so-called big three U.S. automakers, pleaded to receive loan from the government to keep them from running out of cash in months ahead. They blame recent credit tightness for sharp decline in their sales which cut the revenue significantly putting them on the verge of bankruptcy.

Martin Feldstein, economics professor at Harvard University and member of NBER which determine American business cycles, believe that this legislation doesn't address the root of problems of the three automakers. In an interview with Bloomberg, he said that they are not competitive even as other parts of U.S. auto industry because of high wages and other inappropriate agreements with the workers unions.