Business warns central bank against rate hike
Swiss business representatives say the economic recovery remains “fragile” and have urged the National Bank not to raise interest rates again this year.
The Swiss Business Federation, economiesuisse, said on Thursday that the plunging US dollar was hurting Swiss exporters.
A rate hike would probably push up the value of the franc even further, dampening demand for Swiss exports.
Chief economist Rudolf Walser said at a news conference that the combination of the weak dollar, the recent international economic “slowdown” and low inflationary risk meant the Swiss National Bank (SNB) had “no reason” to raise interest rates again this year.
“If the SNB were to raise interest rates again [at its annual meeting next Thursday], that would send a signal that the economy is stronger than it actually is.
“That is particularly so as long as the weakness of the dollar, which influences both the economy generally and prices in particular, affects the franc more directly than the euro.”
The SNB has already raised its key interest rate band twice in a row this year, most recently in September, indicating continued confidence in a sustained economic recovery.
A weak dollar makes Swiss products more expensive abroad undermining exports, which are a key pillar of the country’s economy.
In recent months, the dollar has dropped far below SFr1.30, which many Swiss exporters describe as the “pain threshold”. It is now close to a historic low of SFr1.11.
Turning to the general economic situation, Walser summarised 2004 as a “good” year for the Swiss economy, with overall economic growth set to weigh in at 1.8 per cent – twice the expected annual inflation rate.
Record results
He said the first ten months of the year had seen a “clear improvement” in revenue for the Swiss export sector, with some companies achieving “record results”.
The services sector as a whole had also “developed positively” over the year, while the tourism sector had “overcome its three-year down period”.
Looking ahead, Walser predicted that these sectors would continue to do well in 2005, while private consumption should carry on growing at the current rate of 1.3 per cent per year.
Walser said overall economic growth (gross domestic product) would likely slow to between 1.4 and 1.8 per cent, combined with slightly higher inflation (1.3 per cent) and relatively unchanged unemployment levels (3.6 per cent).
Asked whether he could envisage unemployment dropping below three per cent, Walser said this was a “realistic” longer-term goal, but did not elaborate.
Barriers to growth
On a related note, economiesuisse managing director Rudolf Ramsauer told swissinfo that the country’s economic prospects would depend largely on whether politicians addressed long-standing “structural” barriers to growth.
He said the ongoing reduction of cantonal and federal government budget deficits remained “issue number one”.
Other key issues included monetary policy (interest rates), corporate taxation – the subject of a recent economiesuisse report – and further reform of the higher education system.
In addition, Ramsauer stressed the need for rapid domestic market liberalisation – particularly in the electricity sector – and final acceptance of the second round of bilateral agreements with the European Union.
“I think the political and economic problems we have today have evolved over many years and it would be an illusion to think we can now just solve them all in the space of a year or two,” Ramsauer told swissinfo.
He added that the country was engaged in a “rather bitter” political debate, but this was necessary in order to achieve a “clear diagnosis of the problems”.
“At some stage, consensus will have to be sought, but the diagnosis has to be the first step.”
swissinfo, Chris Lewis in Zurich
About 40 per cent of Swiss exports are paid for in US dollars – making it the second Swiss export currency after the euro.
The dollar, which began the year at around SFr1.23 following steady losses in 2003, is now nearing its historic low of SFr1.11.
The slide is unprecedented, and economists see little prospect of change in the immediate future.
Economiesuisse says raising interest rates now would “send a signal that the economy is stronger than it is”.
It predicts continued export-led economic growth next year, but at a slower rate than in 2004.
The federation also highlights the need for sweeping structural reforms, in areas ranging from electricity markets to higher education.
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