Swiss National Bank Raises Rates 25 Basis Points

The Swiss National Bank raised short-term interest rates by 25 basis points on Thursday for the fifth quarter running, as expected, continuing its gradual monetary tightening despite ultra-low inflation.

The SNB said it had increased its target band for the three-month Swiss franc LIBOR rate to 1.50-2.50%, aiming for the mid-point of 2.00%.

In September the SNB raised the band to 1.25-2.25% with the benchmark mid-point at 1.75%.

All 40 economists polled by Reuters last week had expected the SNB to stick to its campaign of 25 basis point rate increases which it resumed in December last year. A large majority also expects another step in March and most see a further increase in 2007 to end the year at 2.5%.

The SNB had left little doubt that borrowing costs would rise further, saying strong economic growth allowed it to continue "normalising" rates from low levels. SNB board member-designate Thomas Jordan said in an interview published this week that there was potential for higher inflation if monetary policy remained accommodating.

The Swiss economy is heading for its strongest showing in six years with full-year 2006 growth close to 3%. Economists expect growth to slow to around 2% in 2007.

Price pressures have remained well contained as annual inflation picked up only slightly to 0.5 percent in November from a 2-1/2-year low of 0.3%in October. Analysts see inflation averaging 1.0% next year, well within the SNB's definition of price stability which is inflation below 2%.