Central bank boosts Swiss growth forecast

The Swiss National Bank put a more positive spin on prospects for the nation’s economy this year when it released its quarterly monetary policy statement on Thursday afternoon.

The central bank said it revised its outlook for 2010 upwards to 1.5 percent based on "more tangible signs" of an economic recovery.

"The improvement is beginning to assist the Swiss export sector, while the domestic sector is performing well," the SNB said.

But the bank cautioned that the revival remains fragile and fraught with uncertainties.

As a result, it is continuing its expansionist monetary policy, keeping interest rates targeted at 0.25 percent, through its three-month Libor rate.

It also reiterated its commitment, repeated by SNB Chairman Philipp Hildebrand, to prevent an excessive appreciation of the Swiss franc against the Euro, a move designed to help Swiss exporters.

The growth forecast of 1.5 percent is a new display of confidence in the economy. In December the SNB was predicting 0.5 percent expansion in 2010, while on Wednesday this week the bank cited a one percent figure to parliament in a report drafted earlier.

The central bank has been less bullish on the economy than a number of private sector analysts, including UBS, which has forecast two percent growth, although there is no common agreement.

“We are still a bit more optimistic than the SNB for 2010,” said Bank Sarasin economist, Alessandro Bee, who thinks the central bank is being pessimistic in the short term.

Sarasin expects a “sharp recovery” and growth of 1.9 per cent, possibly followed by a slowdown at the end of the year and into 2011.

The Zurich-based Swiss Economic Institute (KOF) disagrees with this analysis.

The institute’s consensus forecast of 1.2 percent, which averages the views of 22 economists in Switzerland, gives a more accurate picture, the KOF director, Professor Jan-Egbert Sturm, told Swisster.

For the moment, the SNB has left interest rates unchanged – as most analysts predicted –although this figure may rise later in the year as the economy continues to recover.

The central bank also said the current inflation rate of 0.95 per cent, which has peaked due to higher commodity prices, is likely to fall during 2010, dropping to 0.52 per cent by the end of the year.

The inflation forecast rises in the medium-term, hitting 2.75 per cent by the end of 2012.

The upper level of the bank’s target range is two percent, so a policy change could be due soon.

"Current expansionary monetary policy cannot be maintained throughout the entire forecast horizon,” the SNB policy statement said.

KOF's Professor Sturm believes the bank "will likely start raising interest rates by the end of the year.”

Peter Rosenstreich, chief market strategist with ACM in Geneva, said the SNB is “miscalculating some of the major events in the market.”

He said while the Swiss economy is robust "it’s not going to escape the effect of Chinese inflationary pressure - that’s the X-factor that will have an effect across the globe.”

Rosenstreich has also been watching the central bank’s “smart” interventionist activity in the currency markets, intended to keep the franc from becoming too expensive.

A euro bought 1.54 francs 12 months ago, but the rate dropped to a low of 1.4618 on Wednesday before rising again.

The euro rose to change hands nearer 1.4630 amid rumours the SNB had intervened in the currency market by selling francs.

The bank acknowledged that it “has been intervening in the foreign exchange market...to counter an excessive appreciation of the Swiss franc against the euro” and it will continue to “act decisively” on the matter.

The strong franc is a burden on Swiss exporters as goods become more expensive for trading partners such as Germany, which uses euros to buy goods.

But Thursday’s forecast said prospects for external trade have improved.

Meanwhile, the low interest rates have encouraged rising mortgage lending, which grew at 5.3 per cent in January.

The SNB warned banks and borrowers to be extremely cautious, in view of the growth in mortgage loans and the continuing increase in residential real estate prices.

The SNB is currently carrying out a survey to check up on banks’ property lending practices.

It also warned that the Swiss economy is still benefiting from government support measures. Only when these are phased out will it be clear that the economic recovery is a sustainable one.