The Swiss National Bank (SNB) has raised its key interest rate for the second time in three months, indicating continued confidence in a sustained economic recovery.
However, the SNB said it would react to any strong upward pressure on the franc as a result of the decision.
The SNB said it would increase the target range for the three-month Libor rate (London Interbank Offered Rate) by a quarter of a percentage point, to 0.25-1.25 per cent.
“Economic activity in Switzerland is developing in line with the National Bank’s expectations,” said the SNB in a statement on Thursday.
“The National Bank still anticipates economic growth to be close to two per cent in 2004.”
The SNB said it expected utilisation of economic output capacity – a key business cycle indicator – to improve steadily over the next two years, while unemployment declined.
It predicted an average annual inflation rate of just 0.7 per cent, notwithstanding the recent surge in oil prices, which it described as “temporary”.
The SNB added that its monetary policy would “remain expansionary”, but did not give any indication of a further rate rise at its next review meeting in December.
Rudolf Walser of the Swiss Business Federation, economiesuisse, said Thursday’s decision had been expected after the SNB normalised its expansionary policy in June.
“The decision today clearly indicates the SNB’s confidence in the prospects for economic growth, and that is positive for the expectations of investors and households,” he told swissinfo.
“The great uncertainty now, of course, is what effect this decision will have on exchange rates.
“We obviously hope that the decision will not result in an undue upward movement of the Swiss franc, as too much of a move upwards could create problems for companies dependent on exports.”
Serge Gaillard, chief economist at the Swiss Federation of Trade Unions, said he too was not surprised by the announcement, which had been widely predicted.
He said the current policy of gradual increases was unlikely to damage the economic recovery, but agreed that the decisive factor would be the extent of the effect on exchange rates.
Representatives of Swiss homeowners' and tenants' associations were less enthusiastic, because of the likely knock-on effects on mortgage rates and rents.
Initial market reaction indicated that there was little cause for concern on the exchange rate front.
Following the interest rate rise, the Swiss franc hit a four-month low against the euro, before recovering slightly.
Analysts attributed the initial negative reaction to the “dovish” nature of the SNB’s accompanying comments, which they said had more initial impact than the rate rise itself.
Swiss interest rates remain very low compared with those in other countries – a factor that has been traditionally considered important for overall economic stability.
However, export-dependent companies – including some big names such as watchmaker Swatch and food giant Nestlé – often say the resulting high exchange rate has a negative impact on their financial results.
swissinfo, Chris Lewis
The SNB’s new target range for the key LIBOR rate is 0.25-1.25%.
It aims to keep the three-month rate in the middle of that range, at 0.75%.
The bank forecasts economic growth of around 2%, with inflation at around 0.7%.
The SNB has raised a key target interest rate by 0.25 per cent – a move widely signalled in advance.
The last such rate rise, in June, came as more of a surprise, and was the first in four years.
The bank said it remained confident about the prospects for the Swiss economy, and promised to react to any undue upward pressure on exchange rates.