UPDATE 1-SNB offers cheaper funds to bring LIBOR down

ZURICH: The Swiss National Bank lowered the costs for one-week funding sharply in its daily repo operation on Thursday as it tries to bring back the short-term interbank rate down to its target. The central bank lowered rate for one-week funds to 1.90 percent, down from 2.00 percent over the last three weeks. "The SNB tries to defend its target for the 3-month Swiss franc LIBOR," said UBS analyst Reto Huenerwadel. "This is a significant cut in the repo rate."

Tensions in the Swiss money market have been high like elsewhere since the beginning of the credit crisis in August 2007 as banks barely lend to each other for fear of exposure to the subprime mortgage crisis. The 3-month Swiss franc LIBOR has been above the SNB's target of 2.75 percent for weeks, and has kept rising despite cheap SNB funds as tensions in money markets remain high. On Wednesday, the LIBOR was fixed at 2.86333 percent.

"It is hard to tell whether it's a higher risk premium in the market that drives the LIBOR or a change in interest rate expectations," Huenerwadel said. The SNB has kept its target rate for the LIBOR steady since September and holds a "wait-and-see" stance, facing opposing policy signals from inflation at a 14-1/2 year high and rising risks for the economy from the global credit crisis.

Markets have recently started to price in interest rate hikes again after SNB officials struck a confident tone on the Swiss economy. "The SNB has now clearly shown that they do not want the LIBOR to rise further," said Huenerwadel. "The futures signal that it might work."

The SNB has also joined other central banks in offering funds in dollars, allotting $6 billion on Tuesday.