17 June 2004, 13:58  Swiss surprise with quater point rate rise

The Swiss National Bank surprised markets with a quarter point interest rate hike on Thursday, making its first increase in four years in recognition that the Swiss economic recovery has gained a firmer footing. The SNB, reacting to the green shoots of Swiss economic recovery after a double-dip recession, stole a march on the U.S. Federal Reserve and European Central Bank by raising its key interest rate target band to 0.00 to 1.00 percent. "Our interest rate increase is merely to be regarded as an appropriate step toward more neutral monetary conditions following a lengthy period of extraordinary circumstances," SNB Chairman Jean-Pierre Roth told a news conference in Geneva.
Economists had not expected a rate increase from the SNB so soon but had noted that it was simply a matter of time before borrowing costs would rise from the record low levels where they had been held for 15 months. "The SNB has begun a process of interest rate normalisation. That is probably going to take rates up to in excess of two percent by the end of next year," said J P Morgan economist Malcolm Barr. The SNB said in its quarterly monetary policy review that it had adjusted its interest rate target band for the three-month Swiss franc LIBOR rate from 0.00 to 0.75 percent where it had stood since March 6, 2003. The SNB said it now aimed for the mid-point of the new 0.00 to 1.00 percent band, or 0.50 percent. It had previously been aiming at 0.25 percent. "The first step has been taken: the second will follow in September. It looks like they will go up in 25 basis point steps," said Andreas Speer, economist at CSFB. The Swiss rose around half a cent against the euro and the dollar on the rate hike while Swiss franc futures shed around 10 percent to price in higher interest rate expectations, though dealers noted that a partial hike had been priced in already.
NOT TIGHTER
Roth said the rate rise should not be viewed as a changeover to a restrictive monetary policy. He said the move underlined the central bank's view that the prospects for the Swiss economy were "robust", even though uncertainties remained. The SNB increased its inflation forecast for the current year to 0.6 percent and one percent for 2005. "The inflation potential, however, will remain modest within the short term," the SNB said. "Since the economic recovery has strengthened and the threat of deflation has disappeared, monetary policy will be tightened slightly." However, the SNB said it would adhere to its expansionary policy for now, supporting an upswing and keeping the attractiveness of the Swiss franc low. The SNB gave a gross domestic product growth forecast of close to two percent for the current year as the Swiss economy powers ahead on the back of an export upturn.///

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