ZURICH, March 9 (Reuters) - A widely expected rate cut by the European Central Bank this week could nudge the Swiss National Bank towards further cutting its own negative interest rates as it seeks ways to weaken a currency it says is overvalued.
While some analysts say the SNB has already played its best cards to try to weaken the franc, it has some left, and the ECB rate cut likely to come on Thursday will focus minds at an SNB policy assessment on March 17.
Here's how the SNB could play it:
A 10 basis points cut in the ECB's negative deposit rate, taking it down to -0.4 percent, would bring it closer to the SNB's -0.75 percent, making the franc a more attractive investment once again compared to the euro.
The SNB has said there is space to lower rates further, leaving economists guessing how low the negative rate could go.
"The possibility can't be excluded that the SNB will lower its LIBOR target range if this development continues," Thomas Stucki, Chief Investment Officer at St. Galler Kantonalbank, said. "It's difficult to say where the SNB's pain threshold lies on negative rates."
For years, the SNB has maintained its willingness to intervene in currency markets to weaken the franc, and economists say foreign currency purchases would be its first counter-move.
Economists believe that would happen should the euro fall below the SNB's 'comfort level' against the franc, seen above 1.07-1.08 francs per euro. The euro traded at 1.097 francs at 1425 GMT on Wednesday.
"I think the SNB will rely mainly on the instrument of exchange market interventions if there is need for it," said Ernst Baltensperger, professor emeritus at the University of Berne. "But I'm not sure that there will really be need for much intervention."
Credit Suisse economist Maxime Botteron expects the SNB to rely on foreign exchange purchases to weaken the franc instead of lower interest rates in March.
But a dramatic play from the ECB could change that.
"Unexpected aggressive monetary easing by the ECB, which would raise appreciation pressure on the Swiss franc, could trigger a lowering of the deposit rate by the SNB as well," Botteron said.
In February, SNB President Thomas Jordan dangled the possibility that the bank could lower its exemption threshold - those deposits not yet subject to negative interest rates - to weaken the franc.
While that move could bring unpleasant consequences, such as increasing the likelihood of banks passing negative rates on to their customers, which could lead to cash hoarding, some believe it would be preferable to a further rate cut.
"Should the euro-franc exchange rate dip below 1.07... we expect a tightening of the exemption, which remains the less costly tool to use," Swissquote analyst Arnaud Masset said.
The SNB's last two rate cuts were announced outside of regularly scheduled policy meetings and its biggest U-turn, to end a franc cap against the euro, dubbed locally as the "Frankenshock", came a month after the SNB's December 2014 policy meeting. (Editing by Robin Pomeroy)