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. It fell to 0.86 percent today.

“We hope to be in a position to force interest rates to move down from 1 percent where they’re now to 0.5 percent,” Roth told Bloomberg Television today. “It will take time. It’s necessary for the economy. We expect 2009 to be a year of recession.”

The SNB’s 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 it also cut the one- week rate it uses to steer three-month borrowing costs to 0.05 percent from 0.1 percent.

Further Steps

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.

The Swiss economy will shrink between 0.5 percent and 1 percent next year, the SNB forecast today. 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.

‘Exit Strategy’

“Of course we have to be very careful and already think about the exit strategy,” Roth said. “As soon as we have the feeling that the economy is moving up again, we should start raising interest rates or adjusting interest rates.”

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. “The past few weeks have seen some calming of global financial markets, but we are still a long way away from normalization.”

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

Last Updated: December 11, 2008 08:41 EST