Interest rates remain on hold

The Swiss National Bank (SNB) has again opted to keep interest rates at historic lows despite the continued strengthening of the franc.

The three-month interbank Libor range will stay the same at between 0.0 per cent and 0.75 per cent with a target rate of 0.25 per cent. The loose monetary policy is aimed at helping exporters survive the strong franc.

While sales and orders have picked up in recent months, the margins of exporters have suffered with the franc reaching highs of SFr1.20 versus the euro, and SFr0.84 against the dollar. The SNB warned that the trend could continue due to enduring debt problems in many countries such as Greece.

The strong franc has inflated the cost of Swiss goods abroad, forcing many manufacturers to lower prices. Raising interest rates would further increase demand for the franc.

The SNB’s monetary stance comes with the warning that it could over stimulate the economy, leading to high inflation. But, economists concur the strong franc acts as a natural brake against such pressure, with the SNB forecasting inflation rates of 0.9 per cent this year, one per cent in 2012 and 1.7 per cent in 2013. 

A bigger risk is that low interest rates could further inflate the cost of housing that has reached bubble like proportions in hot spot areas such as Zurich and Geneva.

“The main risks remain, on the one hand, the effects of the strong Swiss franc on the export industry and, on the other, the danger of overheating in the real estate sector,” the SNB stated as it outlined the delicate balancing act it has to observe.

The SNB maintained its gross domestic product (GDP) growth forecast at two per cent for 2011.