The Swiss National Bank is not finished yet with rate rises and remains on the lookout for import-price-led inflation as the Swiss franc stays weak, SNB board member Thomas Jordan said in an interview published on Sunday.
"From today's perspective, the phase in which further interest rate hikes are needed does not appear to be fully completed yet," he told newspaper NZZ am Sonntag.
Jordan said the central bank was prepared to fend off inflationary pressures related to a weaker franc, but that for now no risk was visible. "A weaker franc tends to stimulate demand and growth here and increases inflation through rising import prices. If that is the case, we would have to react," Jordan said.
"Despite the weakness in the franc, for now we don't see any inflation risk," Jordan said. "We expect that inflation increases slightly over the year to around 1.0 percent towards the end of the year."
Currently inflation in Switzerland was around 0.5 percent, Jordan said. Economists expect the Swiss economy to lose some speed this year after growth reached a six-year high of 2.7 percent in 2006.
But many analysts have started to revise up their forecasts for 2007 from around 2 percent towards 2.5 percent after upbeat economic news. The SNB has raised rates at each of its last six quarterly meetings by 25 basis points, taking the benchmark rate to 2.25 percent.
WEAK FRANC, STRONG EURO:
Turning to currencies, Jordan said so-called carry trades - where investors borrow money in low-yielding currencies like the yen or the franc and buy higher-yielding currencies elsewhere - were probably putting some downward pressure on the franc.
"In the short term, exchange rates are strongly driven by how market participants forecast future rate differences and the risks of currency swings. Today, carry trades are attractive. They have possibly had an influence on the weakening of the franc," Jordan said.
Jordan said one could describe the franc as weak against the dollar and the yen, but that it was best to describe the euro as strong against the franc.
"First and foremost, we have an enormous strength in the euro," he said. "Compared to the dollar and the Japanese yen, one can speak of weakness in the franc."
Jordan said Switzerland's economy had probably increased its non-inflationary growth potential by allowing the free mobility of labour between the Alpine republic and the European Union that surrounds it.
That had led to lower wage pressures and offered Switzerland a greater pool of available labour, which increased growth. Jordan said potential Swiss growth had probably increased from around 1 percent towards 2 percent, helped by labour mobility.