Growing economy needs higher interest rates

Will the National Bank listen and raise its rates? swissinfo.ch

Interest rates must rise for the economy to cope with forecasted growth of 1.5 to two per cent next year, says the Swiss Business Federation, economiesuisse.

The announcement comes two days before the Swiss National Bank (SNB) is expected to raise its key interest rate target range to between 0.5 and 1.5 per cent.

This is a response to predictions that the country’s gross national product in 2005 would grow by 1.7 per cent.

Higher interest rates are essential to combat increasingly volatile economic conditions that were made stormier this year by an unpredictably high rise in oil prices, economiesuisse chief economist Rudolf Walser told swissinfo.

“An increase of target interest rates is necessary because the SNB should find new room for manoeuvre in the foreseeable future,” he said.

“The Swiss economy is strong enough to absorb such increases. It has already adjusted to the expected interest rate rise on Thursday.”

Recovery goes on

Swiss economic recovery will continue, according to economiesuisse.

It predicts GDP growth of between 1.5 and two per cent, inflation dropping to 0.8 per cent and unemployment falling to 3.6 per cent.

This compares favourably with its 2005 forecast of 1.7 per cent growth, 1.2 per cent inflation and 3.8 per cent unemployment.

“Irrespective of uncertainties, one could argue that the Swiss economy is on a very solid growth path,” said Walser, speaking at a forum in Zurich.

Walser believes the Swiss economy has been given a recent lift by political stability in Germany and an upward trend in other world economies.

But he warned against complacency, calling for the electricity market in Switzerland to be opened up further, improvements in the education system and more tax reforms.

The Swiss government is already looking at introducing a flat VAT rate, but Walser believes that reforms do not go far enough and involve a slow political process.

“Switzerland is relatively far away from reform in regards to other countries. Tax policy is not a stable thing, it is constantly reforming, and Switzerland has to be in line with these developments,” Walser said.

swissinfo, Matthew Allen in Zurich

Key facts

On December 1 Switzerland’s State Secretariat for Economic Affairs (Seco) upgraded its forecast for Swiss economic growth in 2005 from 1.3 to 1.7 per cent.
A week earlier, the OECD predicted 1.25 per cent annual growth.
The Swiss National Bank’s current three-month interest rate target range is 0.25 to 1.25 per cent, with a preferred rate of 0.75 per cent.