Central bank raises key interest rate

The Swiss National Bank is applying the brakes to avoid inflationary pressures Keystone

The Swiss National Bank has raised its benchmark interest rate by 0.25 per cent, joining other central banks in tightening monetary policy.

In a widely expected move, the bank announced on Thursday that its interest rate target band would go up to 0.50-1.50 per cent from 0.25-1.25 per cent – the first change in more than a year.

“The moderate increase in the interest rate is compatible with our strategy of making gradual corrections to a very expansionary monetary policy, while taking into account economic recovery,” commented the bank’s president, Jean-Pierre Roth.

“The movements in economic indicators over the past three months confirm this scenario,” he added.

The bank, which determines Swiss monetary policy, said it would continue to lift interest rates gradually as the economic recovery gathered steam.

Recovery continuing

The SNB says it now expects the economy to expand by just over 1.5 per cent this year, up from a previous forecast of one per cent growth.

The rate move follows the European Central Bank’s decision earlier this month to raise interest rates for the first time since 2000.

It also comes after this week’s decision by the United States Federal Reserve to increase its rates again.

The SNB left inflation forecasts for 2005 and 2006 unchanged and cut its outlook for 2007 to 1.2 per cent from 1.4 per cent previously.

Avoid inflation

Alois Bischofberger, chief economist of the Credit Suisse Group, told swissinfo that the rise was aimed at avoiding a resurgence of inflationary pressures.

“Inflation would be dangerous for the economy, and a surge in inflation could also have a negative impact on the exchange rate of the Swiss franc,” he said. “The SNB is interested in maintaining price stability.”

Bischofberger said he believed the rise might contribute to a modest increase in market interest rates but would not have negative consequences for economic growth.

“Even with this increase in interest rates, the interest rate level is still very low if you take a long-term perspective,” he said.

Mixed reaction

There was mixed reaction to the rate rise. While welcomed by the Swiss Business Federation (economiesuisse), it was criticised by unions.

Serge Gaillard, chief economist of the Swiss Federation of Trade Unions, called it a “hasty decision”. He argued that since the recovery was fragile, the bank should have waited until there were signs of falling unemployment before acting.

But the chief economist of economiesuisse, Rudolf Walser, said the bank’s step was logical and timely.

Walser was also pleased that the bank had revised its growth forecast upwards, in line with last week’s prediction by economisuisse.

swissinfo with agencies

Key facts

The Swiss National Bank conducts the country’s monetary policy as an independent central bank.
Its other tasks are facilitating payment transactions and issuing banknotes

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.