Central bank moves to tighten monetary policy

Swiss National Bank president Jean-Pierre Roth is optimistic about the Swiss economy Keystone

The Swiss National Bank has unexpectedly raised its key interest rate by a quarter of a percentage point – the first increase in four years.

Its president, Jean Pierre-Roth, said the move underlined the central bank’s view that the prospects for the Swiss economy were “robust” even though uncertainties remained.

He said he did not expect the decision to set off any extreme moves on the world’s financial markets.

“Our interest rate increase is merely to be regarded as an appropriate step towards more neutral monetary conditions following a lengthy period of extraordinary circumstances,” said Roth.

In a statement from Geneva, the bank said that economic activity in Switzerland was developing in line with its expectations.

It forecast economic growth of close to two per cent this year, although higher oil prices would temporarily trigger price increases. But the inflation potential would remain “modest”, the bank said.

“The increase in oil prices… casts a shadow over the prospects for the economy, which are optimistic overall,” commented Roth at a news conference.

“We are not of the opinion, however, that the upswing is threatened by this,” he added.

He explained that exchange rate effects had cushioned the impact of rising oil prices on the Swiss economy.

Target range

The bank increased the target range for the three-month Libor rate (London Interbank Offered Rate) by a quarter of a percentage point to 0.0 per cent -1.0 per cent.

Despite the interest rate rise, the bank said it would stick to its expansionary monetary policy, supporting the economic upswing and keeping the attractiveness of Swiss franc investments low.

Average annual inflation is likely to amount to 0.6 per cent this year, one per cent in 2005 and two per cent in 2006, according to the bank, basing its forecast on the assumption that the three-month Libor rate would remain steady at 0.5 per cent.

He added that the bank would “react appropriately” should the economic recovery be delayed due to unexpected events or if the Swiss franc appreciated markedly.

“As in the past, the Swiss National Bank shall keep all its options open,” said Roth.

Surprise move

While some analysts questioned the timing of the rate rise, economist Ines Lopes at Goldman Sachs said she had not been surprised by the move.

“They are doing the right thing because growth has picked up and inflation is picking up,” she commented.

“I expect they will continue this move… [and] hike by 25 basis points in September. I don’t think they will want to be very aggressive in the current environment,” she commented.

However, the Swiss Business Federation, economiesuisse, criticised the central bank’s decision, arguing that from an economic point of view, there was no reason for such a “braking manoeuvre” by the bank.

And Serge Gaillard, economist at the Swiss Federation of Trade Unions, described the move as “risky” for exchange rates.

Among the world’s four largest central banks, only the Bank of England has increased borrowing costs this year.

The European Central Bank earlier this month left its key rate unchanged at two per cent, which is double the United States Federal Reserve’s main lending rate.

Banks in Switzerland

In a related development, the Swiss National Bank said that profits posted by Switzerland’s banks last year were SFr12.9 billion ($10.24 billion) or 8.4 per cent higher than in 2002.

At the big banks and cantonal banks in particular, the increase was due mainly to relatively low depreciation and value adjustments.

In the previous year, depreciation and valuation adjustments in these banking groups were “unusually high” and had a negative effect on annual earnings.

But 34 financial institutions made losses amounting to SFr108 million, according to central bank figures.

The number of staff working in the Swiss banking sector at the end of 2003 was again lower than a year before.

Full-time staff decreased by 5,410 to 112,915 – a decline of 4.6 per cent.

swissinfo with agencies

Key facts

The Swiss National Bank said it now aimed for the mid-point of the 0 per cent – 1 per cent band or 0.5 per cent. It had previously been aiming at 0.25 per cent.
The bank is forecasting economic growth in Switzerland of close to two per cent this year, with average annual inflation at 0.6 per cent.

In brief

The Swiss National Bank has unexpectedly increased its key interest rate by a quarter of a percentage point.

It was the first tightening of monetary policy for four years.

The central bank sees no threat to the upswing of the Swiss economy, although it sees some “uncertainties”.