Central bank warns against complacency

Jean-Pierre Roth, president of the Swiss National Bank Keystone

The Swiss National Bank (SNB) has warned investors and international business against complacency.

Its president, Jean-Pierre Roth, said on Friday that global financial crises were still a possibility even though the outlook looked unthreatening.

Roth said investors were showing a “hearty risk appetite” and some may have forgotten that crises in the global financial system could never be ruled out.

“We must remain alert,” he said in a speech at the annual conference of the European International Business Academy at Fribourg University.

“No major financial crisis has shaken the world in recent years in spite of the Iraq war, rising oil prices, major natural disasters, various terrorist attacks and permanent rumours of new terrorist attacks.”

He warned though that the resilience shown by financial sectors could lead people into a false sense of security. “The major challenge for international business today is, to my mind, to keep an eye open even when the waters appear calm.”

Roth made no reference to the SNB’s monetary policy. The SNB holds its quarterly interest rate meeting next week and is expected to raise rates for the fifth consecutive time, taking its benchmark rate to two per cent.

Unprecedented confidence

Roth’s comments come as many equity markets hover just below unprecedented highs and as investors drive asset prices in emerging markets to record levels.

He said the global financial system was probably safer than in the past but the magnitude of potential crises had grown.

“The surge in asset prices in many countries, the absence of volatility in many markets and the low level of credit spreads show that today’s investors have an unprecedented confidence in the future and a strong appetite for all types of risks,” he said.

“Economic fundamentals have without doubt improved in industrialised and emerging countries, but it’s hard to believe that the world economy has now entered a phase of lasting and accelerating prosperity.”

Roth later met the Swiss government in Bern, commenting on his analysis of the economy this year, the forecast for next year and the measures that the central bank was planinng.

He said he was confident about the development of the Swiss economy next year because there were signs of a continuing upswing.

Mixed messages

At the end of November the Organisation for Economic Cooperation and Development (OECD) raised Switzerland’s 2006 gross domestic product (GDP) growth prediction to three per cent from 2.4 per cent in May.

It forecast the rate of growth would slow to 2.2 per cent next year and two per cent in 2008.

Industry order books were full, the tourist season was successful and exports rebounded in the third quarter, the OECD report said regarding the increased optimism.

The OECD put the expected slowdown in the next two years down to the likelihood of further interest rate hikes and slower exports. But strong domestic demand should dampen any negative impetus.

However, also at the end of November, Zurich’s Institute for Business Cycle Research (KOF) said its indicator had fallen for the fourth month running, falling lower than expected to 1.73 from a downwardly revised 1.95 the previous month.

The indicator measures business expectations for the likely performance of the Swiss economy over the next six months.

Switzerland’s industrial and construction sectors were the most pessimistic, while the banking, European Union export and Swiss consumption indicators showed only a slight dip in confidence, according to KOF.

swissinfo with agencies

In brief

In May, the OECD predicted a GDP growth of 2.4% (now 3%) for 2006 and 1.8% in 2007 (now 2.2%).

The latest OECD report expects the percentage of people out of work in Switzerland to fall from 3.9 per cent this year to 3.6 per cent in 2007 and 3.3 per cent in 2008.

The Swiss National Bank (SNB) predicts that the unemployment rate will drop below 3% next year.

The bank forecasts inflation rates will average 1.3% in 2006 and 1.1% in 2007.

Observers expect the Bank to raise interest rates for a fifth consecutive time at its quarterly meeting in December with the possibility of another increase in March. The benchmark rate was raised to 1.75% in September.

Key facts

OECD forecasts for other GDP growth rates:
Eurozone: 2.6% (2006), 2.2% (2007), 2.3% (2008)
United States: 3.3% (2006), 2.4% (2007), 2.7% (2008)
Japan: 2.8% (2006), 2.0% (2007), 2.0% (2008)