During the weeks following the September decision, the international financial crisis took on a greater order of magnitude. This was particularly visible in the rise in risk premia which led to a surge in the Libor from 2.75% to over 3%. Moreover, the financial turmoil had a considerable impact on the global economy. Consequently, the slowdown in economic activity in the US and Europe was more substantial than had been expected at the time of the September assessment.
It was clear that the Swiss economy would be affected by these developments – particularly its export sector. The SNB therefore assumed that growth in 2009 would be below the level expected at the previous assessment. At the same time, however, given the economic deterioration and the substantial drop in oil prices, the improvement in the inflation outlook permitted an immediate relaxation of the monetary reins.
Consequently, on 8 October 2008, the SNB decided to relax its monetary policy in coordination with several other central banks (Bank of Canada, Bank of England, European Central Bank, US Federal Reserve and Swedish Riksbank, with the support of the Bank of Japan), and to bring about a fall in money market rates by initiating a 50 basis point decline in the Libor from 3% – which was about its level at the time of the decision – to 2.5%. In order to achieve this, the target range was set at 2.0–3.0%.
