The Swiss National Bank raised interest rates by 25 basis points for the seventh quarter running on Thursday, and said more increases were likely if the economy remained strong.
Movements in the Swiss franc, which had contributed to a slight deterioration in inflation prospects, were also key to future rate decisions, the bank said in a statement.
The SNB increased the target band for the three-month Swiss franc LIBOR rate to 2-3%, aiming for the mid-point of 2.5%.
"Should economic momentum remain unchanged or should movements in the Swiss franc result in a further relaxation in monetary conditions, further increases in the interest rate are likely in the months ahead," the SNB said.
The SNB raised its inflation forecast, seeing the annual rate averaging 0.8% in 2007, 1.5% in 2008 and 1.7% by 2009. In March, it had forecast inflation of 0.5% this year, and 1.4% next year, rising to 1.6% in 2009.
The Swiss franc fell after the decision, which had been widely expected, trading at 1.6568 per euro. This took it closer to the recent 8-1/2 year low of 1.6614 in mid-May as investors use the interest rate differential with the euro zone for carry trades.
The SNB had left little doubt that interest rates were to rise despite current inflation of only 0.5% -- well below its threshold of 2% -- as above-potential economic growth and the weak franc threatened to push up consumer prices.
All 50 economists polled by Reuters had expected the SNB to stick to its series of 25 basis points rate increases at each quarterly policy meeting, which it resumed in December 2005, and most analysts see another step in September.
Markets had priced in further increases in December and March next year as the improved economic outlook provided the SNB with the leeway to raise rates despite low inflation rates.
The SNB raised its economic growth forecast to almost 2.5% for 2007 from "around 2%" so far, in line with economists' expectations after surprisingly brisk growth in the first quarter. Last year growth reached a 6-year peak of 2.7% reached in 2006.