Central bank set to raise key rate again

Jordan has been at the SNB since 1977

The Swiss National Bank (SNB) looks set to increase its key interest rate again, according to one of its vice-presidents, Thomas Jordan, who has just taken over his post.

Jordan also said in an interview on Sunday that the bank remains on the lookout for inflationary pressures led by import prices.

“From today’s perspective, the phase in which further interest rate increases are needed does not appear to be fully completed yet,” he told the Swiss newspaper NZZ am Sonntag.

Jordan said the central bank was prepared to fend off inflationary pressures related to a weaker franc, but that for now no risk was on the horizon.

“A weaker franc tends to stimulate demand and growth here, and increases inflation through rising import prices. If that is the case, we would have to react,” Jordan said.

“Despite the weakness in the franc, for now we don’t see any inflation risk,” Jordan said. “We expect that inflation increases slightly over the year to around one per cent towards the end of the year.”

Jordan said inflation in Switzerland was currently around 0.5 per cent.

Losing speed?

Economists expect the Swiss economy to lose some speed this year after growth reached a six-year high of 2.7 per cent in 2006.

But many analysts have started to revise their forecasts for 2007 upwards from around two per cent towards 2.5 per cent after encouraging economic news.

The SNB has raised rates at each of its last six quarterly meetings by 25 basis points, taking the benchmark Libor (London Interbank Offered Rate) target to 2.25 per cent.

Turning to currencies, Jordan said so-called carry trades – where investors borrow money in low-yielding currencies like the Japanese yen or the Swiss franc and buy higher-yielding currencies elsewhere – were probably putting some downward pressure on the franc.

“In the short term, exchange rates are strongly driven by how market participants forecast future rate differences and the risks of currency swings. Today, carry trades are attractive. They have possibly had an influence on the weakening of the franc,” Jordan said.

Strong euro

Jordan said one could not describe the franc as weak against the dollar and the yen, but that it was best to see the euro as strong against the franc.

“First and foremost, we have an enormous strength in the euro,” he said.

Jordan said Switzerland’s economy had probably increased its non-inflationary growth potential by allowing the free movement of labour between the country and the European Union that surrounds it.

That had led to lower wage pressures and offered Switzerland a greater pool of available labour, which increased growth.

Jordan said potential Swiss growth had probably increased from around one per cent towards two per cent, helped by labour mobility.

swissinfo with agencies

Key facts

Growth forecasts for the Swiss economy in 2007:
BAK Basel Economics: 2.1%
State Secretariat for Economic Affairs (Seco): 1.7%
Swiss National Bank (SNB): 2%
Institute for Business Cycle Research (KOF): 2.1%
UBS: 1.5%
Credit Suisse Group: 2%
OECD: 2.2%

In brief

The Libor (London Interbank Offered Rate) is a key tool of the Swiss National Bank.

It designates the interest rates fixed every business day by the British Bankers’ Association.

These are the rates at which major banks are prepared to grant unsecured money market loans to each other.