SNB signals further interest rate hikes

Jean-Pierre Roth made his comments during the SNB's annual general meeting Keystone

Swiss National Bank President Jean-Pierre Roth has pointed towards a further increase in interest rates because of the current weak state of the Swiss franc.

While expressing cautious optimism about the state of the Swiss economy, he warned on Friday that the bank would tighten credit further as needed to ensure price stability.

“We remain cautious since the productive resources in our economy are currently more or less fully employed and the Swiss franc has depreciated on the foreign exchange market – thereby tending to make our imports more expensive,” Roth told the bank’s annual general meeting in the Swiss capital Bern.

“We will continue increasing interest rates to the full extent that is necessary in order to preserve price stability in the medium term,” he continued.

A further 25 basis point increase in interest rates – the seventh in a row – is expected at the bank’s quarterly meeting in June.

“Combined with the sustained weakness in the franc, a further rate hike by the SNB in June seems certain,” commented analyst Henrik Gullberg at corporate and investment bank Calyon.

The situation after that remains uncertain, as Roth told a newspaper earlier this week that the need for further increases had become less clear.

Inflation

He says Switzerland’s inflation outlook is positive despite a weak franc.

“The current situation remains comfortable due to the fact that the inflation outlook is moderate and last year’s drop in oil prices is having a favourable impact on the indices,” Roth said.

He told the meeting that he was upbeat about the economy, saying it had grown 2.7 per cent in 2006 – the fastest rate in six years.

“For the current year, the outlook for growth, employment and monetary stability remain very favourable,” said Roth.

Unemployment would continue to fall, supporting consumption, which was already driving the economy, he added.

The president said conditions for exports, the Swiss economy’s main growth driver, remained favourable.

“Recently signs of weakness have been observed in the United States, but a favourable international environment in 2007 can be expected in view of the unchanged vitality of the Asian economy and the recovery of growth in Europe,” he said.

Export boost

The weak Swiss franc had given exporters a boost, Roth told the meeting.

However, he repeated warnings about underestimating the risks of a sudden appreciation of the Swiss franc.

“It would be precipitate to think that the Swiss franc was likely to continue weakening,” Roth said, calling it “paradoxical” that the franc had lost ground against currencies with a far less favourable inflationary outlook.

swissinfo with agencies

Key facts

Growth forecasts for the Swiss economy in 2007:

BAK Basel Economics: 2.1%
State Secretariat for Economic Affairs (Seco): 2%
Swiss National Bank (SNB): 2%
Institute for Business Cycle Research (KOF): 2.4%
UBS: 1.5%
Credit Suisse Group: 2%
OECD: 2.2%

Lessons of history

The Swiss National Bank is celebrating its 100th anniversary this year. It has faced several difficult periods, according to Roth.

The First World War meant financing military expenditure. After the war, social disruption and the high level of inflation were attributed to monetary management failure.

This had a lasting effect on the SNB and mostly accounted for the orthodoxy of the policies that ensued, said Roth.

The SNB restored the gold standard in 1924, but the country was affected by the 1930s financial crisis. The post-Second World War years were more prosperous.

The transition to sustained floating for the Swiss franc after 1973 was “definitely” the most important change of direction in the monetary policy strategy pursued by the bank in its 100 years of existence, he said.

Since then, the SNB had had to learn to operate with floating and to conduct an independent monetary policy.