Central bank touches the brakes once more

The bank signalled it would continue to "normalise" interest rates Keystone

The Swiss National Bank (SNB) raised its key interest rate on Thursday, as expected, by 25 basis points for the fifth quarter running.

It indicated it would continue its gradual monetary tightening campaign as long as the economy continued to grow as planned, despite ultra-low inflation.

The SNB said it had raised the target range for its benchmark rate – the three-month Swiss franc London Interbank Offered Rate or Libor – to 1.5-2.5 per cent, aiming for the midpoint of two per cent.

“If the economy performs as expected, the SNB will further pursue its strategy of gradual normalisation of its interest rates,” the central bank said in a statement.

The SNB is concerned that the fastest economic expansion since 2000 will push up inflation. The Swiss franc’s decline against the euro has partly offset past interest-rate increases by making exports cheaper and imports more expensive.

In September the SNB raised the target range to 1.25-2.25 per cent, with the benchmark mid-point at 1.75 per cent.

Many economists had expected the SNB to continue its campaign of 25 basis point rate increases. They now predict a further step in March and another increase in 2007 to end the year at 2.5 per cent.

Good health

“The economy is currently in excellent shape,” SNB President Jean-Pierre Roth said at a press conference after the decision. “We are pursuing the goal of continuing to ensure long-term price stability.”

The SNB described economic activity in Switzerland as “very robust” and said that next year the economic trend was likely to “continue favourable”, albeit “somewhat less pronounced”.

It left its 2006 growth forecast unchanged at just under three per cent and, looking to 2007, said it expected growth of “around two per cent”, compared with its previous forecast of 1.8 per cent.

The bank said inflation was likely to fall to 0.4 per cent in 2007 compared with its previous forecast of 1.1 per cent.

It said it expected inflation to rise slightly to 0.9 per cent in 2008, compared with its previous forecast of 1.6 per cent.

“It’s a rather dovish statement,” Reto Huenerwadel, an economist at UBS in Zurich told Bloomberg. “They’ll raise rates once more, but that should be about it. It’s a solid downward revision to the 2009 inflation outlook.”

swissinfo with agencies

Key facts

Growth forecasts for Switzerland
State Secretariat for Economic Affairs (Seco): 2.7% (2006) and 1.7% in 2007
Swiss National Bank (SNB): 3% in 2006 and 2% in 2007
Institute for Business Cycle Research (KOF): 2.6% in 2006 and 2.1% in 2007
UBS bank: 3% in 2006 and 1.5% in 2007
Credit Suisse Group: 3% in 2006 and 2% in 2007
OECD: 3% in 2006 and 2.2% in 2007

In brief

The Libor (London Interbank Offered Rate) is a key tool of the Swiss National Bank.

It designates the interest rates fixed every business day by the British Bankers’ Association.

These are the rates at which major banks are prepared to grant unsecured money market loans to each other.