National Bank lifts key rate as economy surges

The latest increase in interest rates might not be the last one this year Keystone Archive

The Swiss National Bank has raised short-term interest rates by a quarter of a percentage point in an effort to prevent faster economic growth from stoking inflation.

The bank said on Thursday it had increased its target for the key three-month Libor rate to 1.5 per cent – the highest rate since December 2001. It added that further rises were in the offing.

The move had been widely expected and follows similar steps by banks around the world, including the European Central Bank and the United States Federal Reserve.

“If economic developments continue as expected the National Bank will further pursue the gradual adjustment of its monetary policy,” a statement said.

Credit Suisse economist Patrick Muehl commented that the rise fitted well with his bank’s expectations.

“We are expecting two more rises to two per cent at the year-end and one in the first quarter of 2007 to 2.25 per cent,” he said.

The Swiss Business Federation (economiesuisse) described the increase as “appropriate” and the Swiss Trade Union Federation also welcomed the move.

In another response to the bank’s announcement the Swiss Tenants’ Association warned property owners not to increase their rents. It said most tenants had never benefited from previous decreases in interest rates.

Two thirds of the Swiss population live in rented accommodation.

Growing fast

Switzerland’s economy grew 3.5 per cent in the first quarter – the fastest pace in almost six years. But it has so far not fuelled inflation, which was 1.4 per cent in May.

The bank announced it expected the economy to expand by just over 2.5 per cent this year, compared with its forecast of around two per cent made in March.

Growth forecasts by other banks and financial experts range between 1.75 per cent and three per cent.

A vice-president of the National Bank, Niklaus Blattner, said the Swiss banking sector was showing resilience despite a rise in interest rates and a deterioration in world capital and credit markets.

“We are convinced that the banks are in good shape at the moment and would be capable of withstanding larger shocks.”

Bumper year

In another development, latest figures show Swiss banks increased their total net profits by a record 58.9 per cent to SFr24.8 billion ($20.2 billion) last year.

The data, published by the National Bank, is based on statistics from 337 banks.

Only 23 financial institutions reported a loss, while the overwhelming majority, notably the two leading banks, UBS and Credit Suisse, made record profits.

The number of jobs in the banking sector grew by 3.3 per cent to 119,464. Most of the new positions are with subsidiaries of Swiss banks abroad.

swissinfo with agencies

Key facts

Swiss economic growth forecast 2006:

State Secretariat for Economic Affairs: 2%
Swiss National Bank: 2.5%
UBS: 3.0%
Credit Suisse: 2.8%
Swiss Institute for Business Cycle Research (KOF): 2.1%
BAK Basel Economics: 2.7%
IMF: 2.2%
OECD: 1.75%

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.

In its latest move the National Bank lifted its target band for the three-month Libor rate to 1.0%-2.0%, aiming for a mid-point of 1.5%.