The SNB left unchanged the target range for the three month Libor at 2.25 - 3.25%. The central bank raised key interest rates for the tenth times during the last three years (chart 2).
In the news conference it was noted that despite its substantial international integration, the Switzerland economy is scarcely affected by the turmoil in the international financial markets.
In the third quarter, Switzerland GDP was up by 3.3%, compared to the same period of 2006. In the judgment of SNB experts the plunge of Subprime and Alt-A mortgage backed bonds prices and turbulence in the financial markets will have dampening effect on the financial sector of Switzerland and consequently on the country’s economy. Negative impact of the crisis in the US real estate market will be positively impacted by strong growth of personal expenditure, which in its turn comes out from increased employment in the various services providing, manufacturing and construction sectors. Exports of equipment and semi-manufactured goods have been boosting due to the demand rise on part of Euro Area and Asia. In this context GDP growth around 2% is expected in next year.
The SNB upgraded inflation perspective for short and medium terms (chart 1). The highest inflation rate will be expected in the first quarter of next year, which will be achieved due to sharp increase in oil prices at the end of this year. Inflation will probably decelerate to 1.5% in the second half of 2008.
The CPI rate will be even lower in 2009, thanks to the moderate growth of world economy, which, in fact, has caused this decision. In short term the main sources of inflation acceleration should be the strengthening of EUR/CHF, which will increase import prices, and will probably raise energy and agricultural prices.
The SNB expected inflation rate is 1.7% in 2008, which is almost 0.8% lower then the forecasted level of CPI in Euro Area. These expectations are based upon the fact that the crisis in the US real estate market will have a negative influence on world economy, and labor migration from emerging markets will increase.
We expected quick completion of interest rate tightening policy and we didn’t err. SNB was forced to change current monetary policy due to high dependence of economy on financial sector and deceleration of the US economic growth. Receiving 4bln USD from the US Fed to cover short term liquidity deficit demonstrated once more the concerns of the central bank related to the developments in financial markets. However, in our opinion, this deal has a psychological nature and it can easily be described as “a drop in the ocean”, since only the UBS (largest bank by assets in the Euro Area and Switzerland) losses have already exceeded 10bln USD.
SWITZERLAND ECONOMIC INDICATORS
Chart 1
Source: National Bank of Switzerland
Chart 2
Source: Bloomberg
