Wednesday, June 18, 2008

SNB May Leave Benchmark Rate Unchanged at 6-Year High of 2.75%

By Joshua Gallu

June 18 (Bloomberg) -- The Swiss central bank will probably leave its main lending rate unchanged at a six-year high tomorrow as slowing growth limits policy makers' room to combat inflation, a survey of economists shows.

The Swiss National Bank's Governing Board led by Jean-Pierre Roth will probably keep the three-month Libor target at 2.75 percent when it meets in Geneva tomorrow, according to 16 of 25 forecasts in a Bloomberg News survey.

Switzerland's economy may lose momentum in the coming months as weakening global demand erodes exports and losses from the U.S. housing crisis eat into earnings at the country's largest banks including UBS AG and Credit Suisse. At the same time, record oil prices are fueling the fastest inflation in 15 years, leaving the SNB in an ``uncomfortable situation,'' Vice President Philipp Hildebrand said May 22.

``The Swiss economy has already cooled considerably and is going to keep slowing in the second and third quarters,'' said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. ``Inflation is high, but it's mostly due to high oil prices, and the SNB can't do much about that. The real threat is to growth.''

Swiss economic growth slowed to 0.3 percent in the first quarter, the weakest pace in more than three years. The country's leading economic indicators fell for a 10th month in May, a sign growth will continue to ease in the coming six months.

Still, inflation threats have increased and gains in the price of oil had surprised the central bank, Roth said May 27. The SNB will take the risks of inflation seriously at its policy meeting tomorrow, Roth said. Crude prices have risen 40 percent this year, helping push the Swiss inflation rate to 2.9 percent in May.

Soaring Prices

The SNB will announce its decision at 9:30 a.m. and Governing Board members Roth, Hildebrand and Thomas Jordan will hold a press conference 30 minutes later.

Soaring prices for oil and food are prompting central banks from India to North America to shift attention from fighting slowing economic growth to stamping out inflation. European Central Bank President Jean-Claude Trichet said June 5 the bank may raise rates as soon as next month to combat rising prices.

Consumer price increases in the 15-nation euro area accelerated to 3.7 percent in May, the fastest in 16 years. The Swiss inflation rate held above the SNB's price-stability threshold of 2 percent for a fifth month.

Since Trichet's remarks, the Swiss three-month Libor rate has risen 15 basis points to 2.92 percent, almost a quarter point higher than the target, as investors increased bets the SNB would increase rates.

Changed Forecasts

BNP Paribas, Credit Suisse Group, Barclay's Capital, Deutsche Bank and economic research group BAK Basel Economics all changed their forecasts last week to say the SNB would raise rates to 3 percent in June.

``Markets have already priced in higher rates,'' said Reto Huenerwadel senior economist at UBS in Zurich who forecasts rates to be unchanged. ``Looking at the economic fundamentals, an aggressive tightening isn't needed. It's a really close call.''

Still, the franc's 19 percent gain against the dollar in the past year is helping cushion the blow of soaring oil prices. At the same time, slowing growth may weaken demand, relieving some pressure on prices.

``The extent to which the economy is going to slow isn't yet certain,'' said Bernard Lambert, an economist at Pictet & Cie in Geneva. ``It's a good time for the SNB to wait and see.''

Some price increases will likely linger even if growth slows. High food costs ``are here to stay'' as governments divert resources to make biofuels, amass stockpiles and limit exports, Peter Brabeck-Letmathe, chairman of Nestle SA, the world's largest food company, said June 16. Food prices ``will establish themselves on a higher level but not at the peaks we have seen,'' he said.

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