National bank holds interest rates steady

SNB President Jean-Pierre Roth said the Swiss economy had further weakened in the first quarter of 2005 Keystone

The Swiss National Bank (SNB) says it will leave key interest rates unchanged for the next three months, in a bid to boost the flagging economy.

Chairman Jean-Pierre Roth said the SNB was also revising down its forecast for 2005 economic growth, from 1.5 per cent in March to just one per cent – a clear signal that a recovery is not yet in sight.

Thursday’s announcements come shortly after the Swiss stock market reached a three-year high.

Following its regular quarterly review, the SNB said it would keep its target band for the three-month Libor rate unchanged at 0.25 to 1.25 per cent.

The markets had expected the decision, which comes amid stagnant growth in the Swiss economy.

“Contrary to the expectations expressed at our last monetary-policy assessment, economic activity in Switzerland remained constrained in the first quarter,” Roth told a biannual media conference in Bern.

“Despite a slight increase in domestic demand, GDP [gross domestic product] stagnated compared with the previous quarter. This disappointing development was mainly attributable to export developments.

“Companies were faced with slack demand and consequently limited their volume of investment. This affected employment, and the resulting uncertain labour-market situation had a dampening effect on consumer spending, which rose at a below-average rate.”

Growth and inflation

The SNB said it now expected the economy to grow by around one per cent this year, below its previous estimate of 1.5 per cent. But it said it was confident that growth would speed up in the second half of the year.

“Despite the sluggish development in the first quarter of 2005, the SNB still expects the economy to recover during the course of the year, with an increase in momentum in the second half,” the central bank said.

At the same time, it expressed optimism over the inflation outlook, saying inflation was likely to average one per cent in 2005.

In 2006 the rate would dip to just 0.5 per cent, the bank predicted, before rising to 1.4 per cent in 2007. All these predictions fall well below the SNB’s two-per-cent threshold for guaranteeing price stability.

Economists with Switzerland’s biggest banks, UBS and Credit Suisse, said they did not expect any increase in interest rates soon.

“At the moment we are still expecting a rate increase in December,” said Reto Hünerwadel of UBS. “But that can change and would require a rapid increase in growth.”

Alois Bischofberger, chief economist with Credit Suisse, agreed: “There are many signs pointing to the Libor rate holding steady. But there could be surprises in store if the economic situation stabilises more than expected.”

swissinfo with agencies

Key facts

The Swiss National Bank is holding its key short-term interest rates unchanged at 0.25 to 1.25 per cent.
It revised its economic growth forecast for 2005 down from 1.5 per cent to one per cent.
The bank said inflation would average at one per cent in 2005, 0.5 per cent in 2006 and 1.4 per cent in 2007.