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Swiss central bank tightens the reins once more

The Swiss National Bank has raised its key interest rate by 0.25% for the seventh quarter running, in a move that had been widely expected by the markets.

The rate increase is a sign the central bank is still concerned with the risk of inflation caused by buoyant Swiss economic growth and the current weakness of the franc. At a news conference in Bern on Thursday, the SNB said it had increased the target band for the three-month Swiss franc Libor (London Interbank Offered Rate) to 2.00-3.00%, aiming for the middle of the range. It added that further interest rate increases were likely if the economy remained strong.

Should economic momentum remain unchanged or should movements in the Swiss franc result in a further relaxation of monetary conditions, more increases in the interest rate are likely in the months ahead, said the bank in a statement. Assuming the key interest rate remains unchanged at 2.5%, the bank expects an average annual inflation rate of 0.8% this year, 1.5% in 2008 and 1.7% in 2009. The SNB's president, Jean-Pierre Roth, said the inflation outlook had deteriorated since the last assessment and a renewed weakening of the franc had not helped the situation. „Today's decision to raise the target range... takes into account this deterioration in the outlook for price stability,” he said. The bank said that Switzerland's economy was „in excellent shape”, developing even better than expected back in March.

It now expects the Swiss economy to grow in 2007 at a rate close to 2.5%. Its previous forecast was for around 2%. Commenting on the rate increase, currency strategist Adrian Hughes at Société Générale said: „The SNB may see the domestic economy is in excellent shape but so is every other economy. So there is no room for outperformance.” Nikola Mirtchev at Informa GlobalMarkets said market reaction should be muted as the rise had been expected. „The inflation profile is little changed at first glance, but shows that the SNB still expects the CPI (consumer price index) to move higher this year and next.” Fabian Heller at Credit Suisse shared that view. „They just increased their estimate of GDP to 2.5%, and they are still talking about a worsening of the inflation risks. We think that the risks for more [rate rises] in 2007 have increased.” (