The Swiss National Bank has tightened monetary policy in a move aimed at ensuring price stability. The rise comes a week after the European Central Bank hiked its interest rate.
At a news conference in Geneva, the president of the Bank, Hans Meyer, announced that the SNB had raised the target range for the three-month Libor rate by 50 basis points from 2.5-3.5 per cent to 3.0-4.0 per cent.
"If the three-month Libor rate were left at the current level, an inflation rate of more that two per cent would have to be expected in the coming years," Meyer said.
This latest move by the SNB follows a similar rate rise by the European Central Bank last week, and will help maintain one of its key objectives, which is a stable Swiss franc-euro exchange rate. The SNB last moved its target range for interest rates higher on March 23.
Analysts expect the rise will result in higher mortgage rates, which in turn will probably mean increases in rents across the country.
Meyer explained that since the current expansion of the Swiss economy outstripped its production potential, a rise in inflation to a rate of more than two per cent in the year ahead was practically unavoidable in spite of the steps taken to tighten monetary policy.
However, he added that according to the Bank's forecast, inflation should again drop below two per cent in the next two years.
Commenting on the economy as a whole, Meyer said that in the first quarter it had grown by just over three per cent in real terms. A similar rise could be expected in the second quarter, he said.
"The situation on the domestic market is characterised by construction spending accelerating significantly, strong demand for capital goods and continued brisk consumer spending," Meyer said.
"In all probability, we shall achieve remarkable growth accompanied by full employment and price stability this year. The other side of the coin is the risk - which tends to increase - to overall economic stability. From today's vantage point, our monetary policy course should enable us to maintain price stability in the medium term," he added.
For 2000, the Bank still expects inflation of around 1.5 per cent.
Meyer also commented on the money laundering scandal which has rocked neighbouring Liechtenstein. He said the problem was not so much a lack of regulation, but that the law was not being enforced.
He said he hoped very much the authorities in Vaduz had understood the need to act, and highlighted the fact that Liechtenstein's currency union with Switzerland meant the principality belonged to the Swiss franc zone.
by Robert Brookes