SNB Raises Rates but Aims to Calm Markets

The Swiss National Bank raised interest rates by 25 basis points on Thursday as inflation risks from the booming economy persisted but said it aimed to calm conditions on the money market, roiled by the global credit crisis.

"The Swiss National Bank is aiming to calm the Swiss franc money market," the SNB said.

The SNB said it had raised the target band for the three-month Swiss franc LIBOR rate to 2.25-3.25%.

The ECB and the Bank of England last week opted for a pause in their tightening campaigns, pointing to uncertainties about how far economies will be hurt by a credit crisis that has driven up money market interest rates.

But the SNB said it was "targeting a three-month LIBOR of around 2.75%, after this rate has climbed as high as 2.9%."

The central bank raised its crucial inflation forecast for 2009 to 1.8% from 1.7% while leaving the 2008 forecast at 1.5%.

"Inflation prospects have deteriorated slightly due to the good state of the economy, the continued high price of oil and the low level of the Swiss franc," the SNB said.

The SNB left its 2007 growth forecast unchanged at "close to 2.5%".

"Due to the international credit crisis, assessment of the economic situation and inflation prospects has become less certain," the central bank said.

A narrow majority of economists polled by Reuters last week had forecast the SNB would follow the decision of the European Central Bank and keep rates on hold as low inflation gave the SNB leeway to wait for more information on the credit crisis.

But many analysts had expected an eighth consecutive quarterly 25-basis-point rate increase as the Swiss economy grows above trend and the Swiss franc remained relatively weak against the euro despite its recent slight appreciation.

"In the statement, it is clear that the SNB sees the risks to the Swiss economy from the U.S. credit crisis as less severe than the ECB," Sarasin economist Alessandro Bee said.

The Swiss franc strengthened against the euro and the dollar in the wake of the rate hike. The euro had fallen to session lows of 1.6420 francs from around 1.6464 before the decision.