The Swiss National Bank has said the outlook for the Swiss economy looks good but warned that the current interest rate level risks letting inflation get out of hand.
Jean-Pierre Roth, the bank's president, announced on Friday that the bank would pursue its policy of hiking official interest rates.
"The inflation forecast we published in March clearly indicates that the current interest rate level is incompatible with long-term price stability," Roth said at the central bank's annual shareholder meeting.
"Consequently we will continue to implement the strategy of monetary normalisation pursued since June 2004."
He added: "We will be doing so in the conviction that a preventive approach is much less painful for our economy than belated corrective measures."
Financial markets expect the central bank to raise interest rates by a quarter of a percentage point at each of its next three policy meetings in June, September and December as it continues to bring back credit costs from historic lows.
Recent data show the $355 billion (SFr444 billion) Swiss economy is on a steady upward path.
Roth said the current favourable global economic situation could be expected to boost Swiss exports and maintain a favourable economy in Switzerland this year.
Switzerland's trade surplus widened in March as a strong rise in exports outpaced an increase in imports.
Roth put Swiss growth at slightly above two per cent this year while inflation would stay around one per cent this year and next – well below its two per cent pain threshold.
But his speech contained a warning. "The prospects for the Swiss economy in 2006 are good, although the most recent rise in oil prices constitutes a new source of uncertainty."
He said high energy costs had so far failed to pose a threat to the favourable outlook – "nevertheless, this ... should not cause us to relax our vigilance with regard to inflationary phenomena".
Roth also said that economic reforms were still urgently required to lift Swiss potential growth to meet the financial demands of an ageing population.
He also condemned calls from some politicians for the central bank's profits and reserves to be diverted towards political ends.
Roth said such calls placed the bank's credibility and even that of the Swiss franc in danger and created the mistaken idea that the current level of monetary and gold reserves is excessive.
"Swiss reserves are in line with middle-ranking reserve holders, such as the Scandinavian central banks," he said.
In a separate development on Friday, the Swiss Institute for Business Cycle Research (KOF) announced its leading economic indicator had easily beaten expectations in April, boding well for growth and raising chances of more interest rates hikes.
The indicator, which points to the expected performance of the Swiss economy in about six months, stood at 1.45 in April – well above the median forecast of 1.32 in a poll of 14 economists and up from a revised 1.40 in March.
KOF said it was the indicator's highest level since March 1998, when it reached 1.50.
swissinfo with agencies
The Swiss National Bank conducts the country's monetary policy as an independent central bank.
Its other tasks are facilitating payment transactions and issuing banknotes.
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