National bank raises rates to cool growth

The Stadler Rail Group is one of many Swiss companies on an economic roll Keystone

The Swiss National Bank (SNB) has raised its benchmark interest rate by a quarter point to 1.75 per cent to offset the fastest economic growth since 2000.

It coincided with an announcement by the finance ministry, forecasting a budget surplus of SFr918 million ($736 million) for next year.

The SNB hiked its target band for the three-month Swiss franc Libor rate to 1.25-2.25 per cent, aiming for a mid-point of 1.75 per cent within the new band.

It was the third rise this year, the fourth in the past 12 months and is the highest rate since May 2002.

The bank was reacting to strong economic growth and higher inflation. It said it now expects gross domestic product to grow by three per cent in 2006, above its previous expectation of just above 2.5 per cent.

The bank now sees inflation averaging 1.3 per cent for the year, up from its 1.2 per cent forecast. It said it expects a rate of 1.1 per cent in 2007 and 1.6 per cent in 2008.

The Swiss economy has been growing at a rate of 3.2 per cent this year and analysts predict full-year growth of around three per cent. This would be the strongest in six years and well above the 1.5-two per cent rate which economists say is the maximum the economy can grow without stoking inflation.

“It’s clear the economy is expanding at a rate that isn’t sustainable, and longer term would pose an inflationary risk,” Thomas Liebi of Bank Leu told the Bloomberg news agency.

The bank is expected to raise rates again at its next policy meeting in December.

Surplus

The finance ministry said the government’s aim of cutting the federal deficit was beginning to bear fruit. The ministry has budgeted for a SFr918 million surplus in 2007.

In a statement, it said this was based on the assumption of 2.8 per cent growth next year, increasing federal income by 7.3 per cent to SFr56 billion.

It said the first phase of its deficit reduction plan would come to a close at the end of the year.

The ministry forecast surpluses of SFr700 million-SFr1.8 billion for the three years beginning in 2008.

The surpluses will be used to cover any extraordinary payments, according to the ministry.

The government’s next task will be a systematic review of federal spending in order to begin a second round of cost cutting. It said this would include the state-run pension plan, tax and administrative reform.

The ministry said this was the only way to keep costs under control in the long-term.

swissinfo with agencies

Key facts

SNB forecast for 2006:
Economic growth: 3%
Inflation rate: 1.3%

Finance ministry budget forecast for 2007:
Earnings: SFr55.95 billion
Expenses: SFr55.03 billion