SNB leaves interest rate unchanged

swissinfo.ch

The Swiss National Bank (SNB) has announced it is keeping its key interest target rate unaltered at 2.75 per cent.

It added however that the outlook for the Swiss economy had worsened as the global credit crisis dragged on.

“Given the deterioration in the international environment, this slowdown will be somewhat more pronounced than anticipated previously,” the SNB said in a statement after Thursday’s decision.

It followed similar announcements last week by the European Central Bank and the Bank of England.

The Swiss central bank also said it expected domestic growth of between 1.5 per cent and two per cent this year. It had previously predicted growth of around two per cent.

It adjusted its inflation forecast in Switzerland upwards to two per cent this year and 1.4 per cent next year, citing the sharp increase in energy prices.

The SNB added that its target band for the three-month Swiss franc Libor (London Interbank Offered Rate) remained at 2.25-3.25 per cent and that it was still aiming for the midpoint at 2.75 per cent.

Analysts had expected interest rates to remain unchanged and reacted accordingly.

“No surprise,” said Klaus Papenbrock at Deutsche Bank. “The inflation risks are mostly in the short- to medium-term. If inflation develops roughly as expected, and if we don’t see any further marked upside surprises, [the SNB] may be willing to cut rates later this year.”

Holger Schmieding at the Bank of America said it was a very “balanced message” but warned: “If the US economic news keeps getting worse, then I would say there is a 60 per cent chance of the SNB cutting rates in June.”

Safe haven franc

Also on Thursday the dollar fell below the 100 yen mark for the first time in over a decade, as well as plumbing fresh record lows versus the Swiss franc, the euro and a basket of major currencies.

Investors remained on edge about the ailing US economy and the likely extent of future interest rate cuts as the Federal Reserve battles to stave off a recession.

News of troubles at hedge funds and subsequent slumps in equity markets came amid a growing sense that Federal Reserve plans to pump hundreds of billions of dollars of liquidity into the banking system will not be enough to prevent further writedowns, losses and possible bankruptcies.

Market analysts say this risk-averse environment is benefiting the Swiss franc as a currency of safe haven and the low-yielding yen.

Robust economy

Last week the State Secretariat for Economic Affairs (Seco) in Bern said Switzerland’s economy grew at twice the expected rate at the end of last year, driven by increased consumer spending and services exports.

Seco said gross domestic product – the value of all goods and services – rose one per cent from the third quarter, twice the rate forecast by even the most optimistic of market analysts.

It added that Swiss economy grew by 3.1 per cent for the year as a whole. This was slightly slower than the previous year but well above the country’s recent annual trend growth rate of below two per cent.

Swiss growth is expected to cool this year as a global slowdown weakens demand for exports and the United States housing crisis hurts earnings at Swiss banks including UBS and Credit Suisse.

According to the Zurich-based KOF Swiss Economic Institute, private consumption is expected to be the main driver of growth.

swissinfo with agencies

Comparison 2007

With real economic growth of 3.1%, Switzerland outperformed the European Union, the United States and Japan in 2007.

The European statistics office, Eurostat, has forecast an average GDP growth of 2.9 per cent for the EU’s 27 member states.

Growth of the US economy was 2.2%, while Japan has reported an increase of 2.1%.

Swiss gross domestic product forecasts

(2008, 2009, publication)

Seco 1.9, 1.7, 20.12.2007

SNB 1.5-2.0, – , 13.03.2008

UBS 1.5, 1.6, 28.01.2008

Credit Suisse 1.9, 1.6, 12.03.2008

KOF 2.1, 1.9, 17.12.2007

BAK Basel Economics 2.1, 2.0, 12.03.2008

OECD 2.0, 2.0, 06.12.2007