Economy braces for interest rate rise

European Central Bank President Jean-Claude Trichet signals a rise in rates Keystone

Switzerland is widely tipped to follow the lead of the European Central Bank (ECB) by raising interest rates later this year – perhaps as early as June.

This content was published on April 8, 2011 - 13:40

Homeowners, investors and exporters are among those awaiting the Swiss central bank’s response, with some observers believing a rise in the cost of lending is overdue. The ECB raised interest rates by 0.25 per cent on Thursday to 1.25 per cent.

All eyes in Switzerland are now focused on the three month Libor (London Interbank Offered Rate) target range that has remained at 0.0 per cent to 0.75 per cent since March 2009. The Swiss National Bank (SNB) again held rates at its last meeting in March of this year, but raised its inflation prognosis.

For many economists, the ECB’s move on Tuesday put the last brick into place for the SNB to follow suit.

“The euro is gaining strength against the franc, the economy is still in good shape while the risk of inflation is on the upside,” Bank Sarasin economist Ursina Kübli told

“We expect the first rise of 25 basis points in June followed by another hike in the fourth quarter.”

Franc fears ease

The Swiss economy has been showing signs of a sustained recovery from the global recession having come through the bleakest years in relatively good shape compared with many other advanced economies.

The major drag on growth has been the rapid rise in the strength of the franc, inflating the cost of Swiss goods sold abroad. But export figures showed an upswing last year and continued to defy pessimists by gaining in strength early in 2011.

Despite fears that economic output will slow in the latter half of this year, all forecasts have been upwardly revised in the past few weeks. The SNB now believes gross domestic product (GDP) will rise by two per cent this year, compared with a December prognosis of 1.5 per cent.

The central bank has also long abandoned its intervention in the foreign exchange markets to prop up the franc, a measure that cost it SFr19 billion ($21 billion) last year.

The franc gained 12 per cent in value against the euro last year but has lost ground steadily since the start of 2011.


The SNB justified the losses by claiming they helped stave off the threat of deflation but it is now turning its attention to inflation, which the Bank predicts will hit 0.8 per cent this year and 1.1 per cent in 2012.

Economic forecasters BAK Basel thinks the price of goods and services could even tip two per cent next year unless action is taken.

Most economists believe the time is ripe for an interest rate hike. “We cannot wait forever to see interest rates normalised again and I think it is about time the SNB started doing so,” Jan-Egbert Sturm, head of the KOF Swiss Economic Institute told last month.

Switzerland has more to gain and less to lose than many industrialised countries from an interest rate rise.

The United States recently rejected such a hike with its economy still struggling to get out of first gear and Britain has also resisted the temptation to raise rates.

Struggling European economies such as Ireland, Greece and Portugal (the latter poised to be the latest country to receive a European Union bail-out) are faced with a mountain of debt to pay off.

Safe as houses?

Homeowners have the most to fear from an interest rate rise, particularly in countries such as Spain that has a high level of mortgage debt – and that for the most part exposed to the fluctuating cost of borrowing.

Switzerland, in contrast, has a relatively low rate of home ownership (around 40 per cent, but rising) and around 80 per cent of mortgage debt has been locked into fixed low interest rates.

The Swiss property market barely noticed the financial crisis and the global recession, while housing prices took a massive dive in many other economies.

The robustness of the Swiss property market has now sparked some concern as a wave of highly skilled immigrant workers has pushed prices up to unsustainably high levels in areas such as Geneva, Zug and the tourist destination of St Moritz.

Many observers have been calling for an interest rate rise to cool down home prices in hot spot locations.

“A moderate rise in the key interest rates will strengthen the position of Swiss home owners,” the Swiss Home Owners Association said in a statement on Thursday.

The Swiss National Bank meets every three months to determine interest rates, with the next announcement due in June.

Economic indicators

The Swiss economy grew by 2.7% last year despite pressure on exporters caused by the strengthening franc.

At the end of 2010, most economists had predicted a significant drop-off in GDP growth this year, mirroring a global trend as government spending tailed off.

However, this failed to materialise to the degree that most economists thought, with exports in particular defying predictions.

Swiss exports recovered from a low of  SFr187 billion in 2009 to SFr216 billion last year, while February 2011 figures leapt 10%.

The continued expansion of the Swiss economy has forced economists to revise their predictions.

In December, KOF predicted Swiss GDP to grow by 1.8% in 2011, but revised this significantly upwards to 2.8% last month.

Seco also raised its forecast to 2.1% in March 2011 from 1.5% expressed in December.

The SNB believes the Swiss economy will expand by 2% this year, revising its 1.5% estimate at the end of 2010.

BAK Basel is also more optimistic than a few months ago, now believing GDP will grow by 2.4% from an earlier forecast of 1.7%.

The SNB expects inflation to peak at 0.8% this year, 1.1% in 2011 and 2% in 2013 under current conditions.

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