SNB Raises Benchmark Rate to Head Off Inflation

The Swiss central bank raised its benchmark interest rate for the eighth time since late 2005 to head off inflation even as rising credit costs threaten to weigh on economic growth.
Bloomberg 9/13/2007 6:10:43 AM

The Swiss National Bank's governing council, led by Jean- Pierre Roth, increased the 3-month Libor target rate by a quarter-point today to 2.75 percent, the highest since September 2001. Eleven of 20 economists in a Bloomberg News survey forecast the increase while nine predicted the Zurich-based central bank would leave the rate unchanged.

The SNB is concerned that inflation will accelerate after the economy expanded at the fastest pace since the turn of the decade last year. Today's decision comes a week after the European Central Bank and Bank of England left rates unchanged amid concern the U.S. housing slump, which has made banks reluctant to lend and pushed up borrowing costs, will harm economic growth.

"Caution is certainly guiding all central banks at the moment, but the SNB is in a different situation,'' said Janwillem Acket, chief economist at Julius Baer Holding AG in Zurich, who correctly forecast the quarter-point increase. ``We have a booming economy.''

Inflation will average 0.6 percent this year before accelerating to 2 percent in mid-2008, the SNB said in a statement. The economy will expand 2.5 percent this year after growth of 3.2 percent in 2006.

Franc Gains

The Swiss franc extended gains against the euro, rising to 1.6430 after the decision from 1.6475 yesterday. It rose to 1.1819 from 1.1849 against the dollar.

Switzerland's second-quarter economic growth was driven by the largest investment in equipment and machinery since the three months ending March 1998, suggesting companies are expanding to meet full order books. Increased hiring pushed unemployment to a five-year low in August.

"Looking at Switzerland's economic fundamentals, the SNB has plenty of room to continue hiking rates,'' said Rajel Khambhaita, an economist at Informa Global Markets in London.

While a decline in the franc has boosted the economy by making Swiss exports more competitive, it also threatens to stoke inflation by making imports more expensive.

Still, inflation slowed to 0.4 percent in August from 0.7 percent in the previous month.

SNB governing council member Thomas Jordan said Aug. 28 the outlook for second-half growth has become less certain because of turmoil in financial markets. Switzerland's growth may be pulled back by a slowdown in the U.S. and Europe.

The Organization for Economic Cooperation and Development lowered its growth forecast for the U.S. to 1.9 percent from 2.1 percent and for the euro region to 2.6 percent from 2.7 percent.

Switzerland's benchmark rate of 2.75 percent is the second- lowest of major economies after Japan's 0.5 percent, encouraging investors to borrow francs to invest in countries with higher interest rates. The franc has fallen about 2.3 percent against the euro this year.


SNB Raises Benchmark Rate to Head Off Inflation