Switzerland's economic recovery appears to be nearing its peak but markets are watching for indications that inflationary pressures are enough to convince the central bank to keep ratcheting interest rates higher.
Recent leading indicator readings suggest that the recovery which began last summer may already begin to run out of steam later this year as Switzerland's economy reaches its potential annual growth rate of around 2 percent.
However, record high crude oil prices and the potentially inflationary effect of over a year of expansionary policy will likely prompt the central bank to keep nudging the cost of borrowing higher from current ultra-low levels, economists say.
"Domestic inflation is in the spotlight as the SNB will want to see whether stronger growth is creating upward inflationary pressure," said Goldman Sachs economist Ines Lopes.
Consumer price inflation for August, due to be released on Wednesday at 0545 GMT, is expected to tick 0.9 percent higher, according to a Reuters poll of economists, as spiralling oil prices drive the cost of key goods upwards.
Economic growth, however, appears set to peak towards the end of the second half as over-capacity in Switzerland's capital-goods oriented industry is absorbed and export demand is sated.
"The recent downward revision of the KOF barometer has confirmed our view that leading and sentiment indicators world-wide are about to peak," Bank Sarasin's chief economist Jan Poser wrote in a note.
After deteriorating in recent months, the manufacturing purchasing managers' survey is expected to stall in August at around 55.5 points - but comfortably above the 50-point barrier dividing growth from contraction, according to economists.
The index is due to be released on Wednesday at 1300 GMT.
"However, the message is clear: growth is decelerating again and we have to prepare for weaker figures in the near future," Poser added.
The Swiss government on Friday reiterated its modest growth target of 1.8 percent for this year but said the adverse risks from rising oil prices and a slowdown in Switzerland's biggest trading partners had increased.
Factors such as these, together with the weaker KOF indicator readings, have dampened expectations for higher interest rates in the coming six months, with futures currently pricing in only an additional 15 basis points by mid-September.
However, Credit Suisse continues to see a 25 basis-point rate increase at the next policy review on September 16 as the SNB reins in liquidity and nudges up borrowing costs from its current benchmark of just 0.50 percent.
"We expect the national bank to carry out another - albeit cautious - rate hike amid the burgeoning excess money supply," Credit Suisse economist Anja Hochberg said.
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