The SNB raised the target range for the three month Libor by 0.25% to 2.25–3.25%. The central bank raised key interest rates for the tenth times for the last three years (chart 2).
In news conference it was noted that despite high volatility on the global financial markets, economic developments in Switzerland continue to meet expectations.
In the second quarter, Swiss GDP was up by 3%, compared to the same period of 2006. In the judgment of SNB experts the employment increase will extend further domestic demand and ensure 2.5% growth of Swiss economy in 2007. High rate of capacity utilization in the manufacturing sector steps up the demand for capital goods and favors the solid growth of equipment and building investment. Exports of equipment and semi-manufactured goods have boosted due to the demand rise on part of EU. However, the plunge of 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.
The SNB upgraded inflation perspective for short and medium terms. The lowest inflation rates will be expected in the 3Q and 4Q of this year. In particular, CPI growth rate will be 0.7% and 1.2%, because of fall in oil prices at the beginning of this year. Inflation will probably accelerate to 1.3% in the 1Q of 2008. The CPI rate will surge next year, which has caused this hike of interest rates. The main sources of acceleration should be the strengthening of EUR/CHF, which will increase import prices, and will probably raise the energy prices.
The SNB expected inflation rate is 0.6% in 2007, which is two and a half times lower then the forecasted level of CPI in EU (chart 1). These expectations are based upon the fact that the crisis in the US mortgage market will have a negative influence on world economy and labor migration from emerging markets will increase.
In our opinion, the gap between forecasted inflation in Switzerland and the EU, high dependence of economy from financial sector and sharp deceleration of the US economic growth will enforce SNB to accomplish the tightening cycle. Such monetary policy will increase or leave at current level interest rates spread.
SWITZERLAND ECONOMIC INDICATORS
Chart 1
Source: National Bank of Switzerland
Chart 2
Source: Bloomberg
