The Swiss National Bank raised key interest rates by a quarter percentage point as expected on Thursday, its second move this year to lift borrowing costs from near-zero levels as the economy recovers modestly. The SNB raised its interest rate target band for the three-month Swiss franc LIBOR rate to 0.25 to 1.25 percent, and now aims for the mid-point of the band, or 0.75 percent, the bank said in a statement after its quarterly policy review. "The second interest rate rise by 25 basis points now announced will reverse the interest rate cut of March 2003 which was made under extraordinary circumstances," the SNB said. Interest rate futures rose slightly on the rate rise suggesting that interest rate expectations for the rest of the year were being toned down, given the SNB's message that borrowing costs had returned to more normal levels. "The interest rate increase is evidence of the National Bank's confidence in a continued upswing. The monetary conditions will remain expansionary," the bank said. All economists in a poll this week had predicted the quarter percentage point increase. The SNB began tightening monetary policy in June after more than a year of the near-zero rates as the Swiss economy pulled out of recession.
The bank raised its inflation forecast to 0.7 percent in 2004 from 0.6 percent but left its 2005 forecast at 1.0 percent. The 2006 forecast was revised down to 1.7 percent from 2 percent, suggesting medium-term price stability is not at risk. The SNB left its economic growth target for 2004 at close to 2 percent, adding it expected capacity utilisation to improve. The recent rise in oil prices was assumed to be only temporary. The SNB stole a march on European and U.S. counterparts with June's 25 basis point rate rise -- the first in four years -- and has said it will continue to lift rates at a modest pace in order to normalise the cost of borrowing from record lows.///