Central Banks Look Past Rate Cuts

By MARTIN GELNAR and NATASHA BRERETON
ZURICH -- As European central banks gear up to cut their benchmark rates closer to zero, policy makers are increasingly considering using tools apart from interest rates to boost faltering economic growth.

Tuesday's news that Switzerland slipped into a technical recession in the fourth quarter of 2008 firmed expectations that the Swiss national bank will lower its policy rate closer to zero. The U.S. Federal Reserve lowered its benchmark rate to near zero in December.

The Swiss National Bank is now expected to lower its policy rate to a historic low of 0.25% from the current 0.5% when it meets next week.

The European Central Bank and the Bank of England, both of which announce rate decisions on Thursday, are also expected to discuss taking unconventional policy steps to unclog jammed credit markets.

Switzerland's gross domestic product shrank 0.3% in the fourth quarter from the third, government agency Seco said. That marks two consecutive quarters of declines.

"Contracting exports combined with slumping investment and easing private consumption is a worry for Switzerland and suggests that economic growth will come in significantly weaker in 2009," said Melanie Bowler, an economist with Moody's economy.com.

Swiss central-bank officials have in the past few weeks indicated that their next monetary-policy steps could include elements such as buying government bonds to boost the amount of money in the Swiss economy or intervening on the foreign-exchange market to weaken the Swiss franc or stem a rise in its value relative to other currencies.

Separately, U.K. Chancellor of the Exchequer Alistair Darling indicated the Bank of England could boost the money supply through the purchase of assets such as government debt as soon as this month. "We've given them the levers," Mr. Darling said Monday, according to an interview published by the Daily Telegraph.

The framework under which the measures would be implemented is due to be published in an exchange of letters between Mr. Darling and Bank of England Gov. Mervyn King Thursday. Many economists expect the central bank's Monetary Policy Committee to announce the start of such steps following its two-day meeting this week.

Markets expect the government to allow the central bank to increase money supply by about £100 billion to £200 billion ($140 billion to $280 billion) by purchasing public and private-sector securities. The bank also is widely expected to cut its main policy rate to 0.5% from 1% on Thursday.

The European Central Bank, expected to cut interest rates again on Thursday after more signs of economic contraction in February, also could soon begin introducing unorthodox monetary policies to feed cash into companies.

ECB governing-council member Christian Noyer said the central bank for the 16 countries using the euro is studying whether to go ahead with plans to release more money in to the economy by unconventional means, saying the ECB is considering all options.

The ECB is expected to cut interest rates to 1.5% from the current 2% after witnessing a string of negative economic indicators, including contracting manufacturing and rising unemployment.

Write to Martin Gelnar at martin.gelnar@dowjones.com and Natasha Brereton at natasha.brereton@dowjones.com