Philipp Hildebrand, president of the Swiss National Bank. Photographer: Adrian Moser/Bloomberg
Swiss National Bank President Philipp Hildebrand may soon have room to raise borrowing costs for the first time in almost four years as the economy defies the franc’s surge.
Policy makers are weighing the threat of near-zero interest rates stoking property prices against the risk that an increase in the benchmark will push up the franc. While the currency has gained about 20 percent against the euro since the SNB cut its benchmark to 0.25 percent in March 2009, there are few signs that the exchange rate is undermining the recovery, with exports increasing and leading indicators signaling quickening growth.
“Does the economy really need interest rates near zero?” said David Kohl, deputy chief economist at Julius Baer Group in Frankfurt. “No, it doesn’t. Now is exactly the right time to raise borrowing costs because any increase would only show an impact on the economy in a year,” he said. The recovery is strong enough to weather borrowing costs of 1 percent to 1.5 percent, according to Kohl.
While Swiss rates, the lowest among major global economies after Japan and the U.S., have spurred the economy’s recovery from a 2009 slump, they’re also fueling housing demand. Prices for single-family homes jumped 4.7 percent in 2010, data compiled by real-estate consultant Wueest & Partner AG show. The region of Geneva led the gains, with prices climbing 12 percent.
Mortgage Market
Hildebrand toughened his tone on the mortgage market last month, saying that “imbalances with serious repercussions” can emerge if borrowing costs remain at a “very low level for a long time.” In their March assessment, policy makers said the property market warrants their “full attention.”
“An increase would be the beginning of a normalization,” said Caesar Lack, head of economic research at UBS AG’s Wealth Management Research in Zurich and a former SNB economist. “It wouldn’t have much of an impact on the franc. But the fact that they’ve kept rates on hold for so long indicates that they’re extremely worried about possible implications.”
Five of 23 economists in a Bloomberg survey forecast that the Zurich-based SNB will raise its key rate on June 16, compared with none in March, marking the biggest division since the SNB cut its benchmark rate to near-zero more than two years ago. Among those predicting an increase are analysts at UBS and Bank of America/Merrill Lynch.
Upside Risks
The European Central Bank increased borrowing costs last month for the first time in almost three years, while central banks in Sweden, Norway and Russia also have raised their benchmark rates. Hildebrand has indicated a growing unease about price pressures, saying April 29 that the economy is expanding “more vigorously than anticipated” and “certain upside risks” on inflation “are beginning to emerge.”
The median forecast among economists is for a rate increase in September. The SNB has four regular meetings a year.
The franc was at 1.2422 per euro at 11:17 a.m. in Zurich, after reaching a record of 1.2324 yesterday. The currency, perceived as a so-called safe haven, has risen 6 percent since April 6 as the euro-area’s debt crisis worsened. It was at 88.23 centimes versus the dollar, down from an all-time high of 85.54 centimes on May 4.
SNB Vice Chairman Thomas Jordan told Swiss state television in an interview broadcast last night that while policy makers are “very concerned” about currency developments, exporters have “coped relatively well” with the franc’s appreciation.
“The currency isn’t having any significant impact on the economy,” said Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt. The SNB “clearly risks being behind the curve,” he said.
Overcoming Appreciation
Data suggest the recovery can withstand a policy tightening just as it has overcome the currency appreciation. Strengthening global growth has boosted demand for goods ranging from Swatch Group AG (UHR) watches to ABB Ltd. (ABBN) turbochargers, with exports surging 9.8 percent in the first quarter from a year ago when adjusted for inflation and work days. Unemployment is at 3.1 percent, the lowest since February 2009, and KOF leading indicators rose to the highest in almost five years last month.
The Swiss economy may expand 2.4 percent this year and 1.9 percent in 2012, the BAK Basel Economics research institute said. That’s above the SNB’s forecast of about 2 percent for 2011. In 2010, gross domestic product rose 2.6 percent. In the euro region, GDP may advance 1.6 percent this year, the European Commission said.
Foreign sales continued to grow even as the real effective exchange rate rose 10 percent in the past year, according to Jan Amrit Poser, the chief economist at Bank Sarasin in Zurich. Such an appreciation usually translates into a 15 percent plunge.
‘Export Miracle’
This “can only be described as an export miracle,” Poser said. “It appears that exports are less susceptible to prices than generally thought. We expect that the SNB will undertake its first tentative interest-rate hike in June.”
For Alexander Koch, an economist at UniCredit Group in Munich, the SNB can afford to keep borrowing costs on hold until its September meeting. Inflation was 0.3 percent in April, compared with 2.8 percent in the euro area, partly as the franc’s gain softened the impact of rising oil prices.
“The economic situation has improved further and exports have resisted the franc’s strength,” Koch said. “Still, as long as inflation remains subdued, there’s no need for the SNB to raise rates anytime soon.”
