By Joshua Gallu and Simone Meier Dec. 11 (Bloomberg) -- The Swiss central bank cut its interest rate to a four-year low of 0.5 percent and said further measures are possible as the economy faces a recession that may be the worst since 1982. The Swiss National Bank’s Governing Board in Zurich, led by Jean-Pierre Roth, lowered the three-month Libor target by 50 basis points, matching the median of 18 estimates in a Bloomberg survey. The rate for borrowing francs for three months in London was at 1.14 percent yesterday. The SNB “will take all necessary steps to gradually bring the Libor down to the middle of the target range,” which now lies between zero and 1 percent, the central bank said in a statement. “The Swiss economy will be heavily affected” by slowing global growth and market turmoil. The SNB decision takes it closer to being the first central bank in Europe to reduce its benchmark to zero as the financial crisis saps growth across the Swiss economy. As policy makers run out of room to reduce the key rate, Roth may need to follow the U.S. Federal Reserve and announce new tools to revive growth. “The SNB might not have used up all its firing power,” said Reto Huenerwadel, an economist at UBS AG in Zurich. “But it won’t be easy to push the three-month Libor lower.” The SNB’s options are narrowing after today cutting the one- week rate it uses to steer three-month borrowing costs to 0.05 percent from 0.1 percent. Other Tools Board member Thomas Jordan said further steps could include extending the maturities of money-market transactions or intervening “in markets other than the money market” adding that the time has not yet come to use such instruments. “We could engage in quantitative easing and we could intervene in foreign exchange markets or we could buy up bonds and try to influence long-term interest rates,” Jordan said. “All these options are open and we’re not limited in any way in choosing from among these instruments.” Under quantitative easing the central bank injects more reserves into the banking system than needed. A weaker franc stimulates the economy by making exports more competitive and lower bond yields encourage investment elsewhere. The franc weakened 0.5 percent to 1.5688 per euro by noon in Zurich, the lowest level since Oct. 3. It appreciated 0.6 percent to 1.1914 versus the dollar. Korea, Taiwan Central banks from Auckland to London have stepped up rate cuts in the past two months as the financial crisis ricochets through their economies. South Korea and Taiwan reduced interest rates today to shore up economies buffeted by declining demand for exports amid recessions in the U.S., Japan and Europe. The Bank of Korea lowered its rate to a record 3 percent and Taiwan’s central bank cut its benchmark by the most in 26 years to 2 percent. Last week, the European Central Bank reduced by a record 75 basis points to 2.5 percent Bank of England lowered borrowing costs by 100 basis points to 2 percent. The Fed reduced its key rate to 1 percent in October and economists at JPMorgan Chase & Co. and HSBC Securities USA Inc. forecast it will fall to zero next week. Swiss policy makers may have to take further measures as their economy slips into recession. The SNB now expects the economy to shrink between 0.5 percent and 1 percent next year. A contraction of 1 percent would be the worst since 1982 and 0.5 percent would be the biggest decline in gross domestic product since 1991. Generous, Flexible The SNB said it “will continue to provide the Swiss franc money market with a generous and flexible supply of liquidity.” Credit market turmoil is hurting Switzerland, where financial companies from insurers to mortgage lenders make up more than 20 percent of the economy. Credit Suisse Group AG, Switzerland’s second-largest bank, will eliminate 5,300 jobs and scrap bonuses for its top executives after about 3 billion francs ($2.5 billion) of losses in the past two months, the company said on Dec. 4. UBS AG and Credit Suisse may face further losses because of “difficult market conditions,” said SNB Vice-President Philipp Hildebrand today. “The past few weeks have seen some calming of global financial markets, but we are still a long way away from normalization,” he said. Swiss leading indicators fell to the lowest in more than five years last month, manufacturing contracted at the fastest pace since at least 1995 and unemployment is rising. Companies like Rieter Holding AG and Schmolz & Bickenbach AG have cut sales forecasts. To contact the reporter on this story: Joshua Gallu in Zurich jgallu@bloomberg.net

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