Christine Lagarde is in pole position. Having put her name forward last week, the silver-haired French finance minister may well become the new managing director of the International Monetary Fund (IMF).

Lagarde has, with a depressing inevitability, secured the backing of most European countries. The UK was among the first to endorse her. There are rumours the mighty US could soon throw its weight behind Lagarde – making her bid a fait accompli.

FULL STORY AT THE TELEGRAPH

The Baseline Scenario: The Problem With Christine Lagarde

By Simon Johnson

Ms. Christine Lagarde, French finance minister, is the nominee of the European Union for the recently vacant position of managing director at the International Monetary Fund.  The EU has just over 30 percent of the votes in this quasi-election; the US has another 16.8 percent and seems willing to keep a European at the fund if an American can remain head of the World Bank.  It should be easy for Ms. Lagarde to now travel round the world engaging in some old-fashioned horse trading, along the lines of: Support me now, and I or the French government will get you something suitable in return, either at the IMF or elsewhere.

The contest to run the IMF seems over before it has even really begun.  But Ms. Lagarde has a serious problem that may still derail her candidacy, if there is ever any substantive, open, or transparent discussion of her merits.  There is major design flaw in the eurozone and Ms. Lagarde is the last person that non-European governments should want to put in charge of helping sort that out.

FULL ARTICLE AT BASELINE SCENARIO

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A 10,200-acre (4,100-hectare) desert site in Arizona sold for $32.5 million this week, five years after a group with investors including the California Public Employees’ Retirement System paid $400 million for the land.

Arcus Property Solutions LLC, a private-equity fund with about $100 million under management, paid cash for the property in Goodyear, about 60 miles (97 kilometers) southwest of Phoenix, said Kent Kleinman, a spokesman for the Gilbert, Arizona-based company. The site, now called Amaranth Land LLC, had been planned for a 42,000-home community by the Calpers- financed group when it was purchased in 2006.

The deal shows how property investors are taking advantage of a plunge in values after the real estate bubble burst in Arizona. A group of lenders, led by Goldman Sachs Group Inc. (GS), seized control of the Amaranth site in 2009 after the bust halted development, said Jeff Garrett, owner of Garrett Development Corp., the land’s manager after the foreclosure.

“Five, six years ago, people were spending $200 million or $300 million or $400 million,” Garrett said in a telephone interview. “This just sold for about eight cents on the dollar.”

FULL ARTICLE

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* US Treasury says China yuan “substantially undervalued”

* US-China Business Council says backs Treasury decision

* Analyst says currency report becoming a “minor joke” (Adds quotes from report)

By Doug Palmer

WASHINGTON, May 27 (Reuters) – The U.S. Treasury Department ruled on Friday China was not manipulating its currency to gain an unfair trade advantage, but said Beijing still needs to allow the yuan to rise much faster in value.

Although the Obama administration has often used blunt language to warn China over its currency practices, the semiannual report issued by Treasury on Friday maintained its practice of avoiding the harsher step of naming it a currency manipulator.

FULL STORY

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(Reuters) – Ratings agency Fitch on Friday cut its outlook on Japan’s sovereign debt, warning that the vast cost of a March earthquake and tsunami and the still-unknown bill for the clean-up after the nuclear disaster would further strain the country’s already shaky public finances.

The Fitch move means all three major ratings agencies now have their fingers poised on the trigger to downgrade Japan’s credit status unless they see moves by the government to strengthen the country’s finances.

Fitch cut its outlook to negative from stable and affirmed its AA minus local currency rating, its fourth highest and the same level as S&P’s but one notch below Moody’s Aa2.

“A stronger fiscal consolidation strategy is necessary to buffer the sustainability of the public finances against the adverse structural trend of population aging,” Andrew Colquhoun, head of Fitch’s Asia-Pacific Sovereigns team, said in a statement.

FULL ARTICLE

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WASHINGTON—The centerpiece of the American trade agenda—a trio of international trade pacts worth $13 billion in new U.S. exports—is in peril as Democrats and Republicans battle over a program that provides aid to U.S. workers.

The dispute over the future of the 50-year-old Trade Adjustment Assistance program, which provides benefits to American workers displaced by foreign competition, is putting pending free-trade pacts with South Korea, Colombia and Panama in jeopardy by pulling them into the contentious debate over federal spending.

The Obama administration and Democrats in Congress want the TAA program renewed. Some Republicans question its value and say it should be scaled back to narrow the deficit.

The delay caused by the congressional sparring means it is now virtually impossible to pass the South Korea agreement before a trade pact between Korea and the European Union takes effect July 1. That will put a wide range of U.S. industries at a competitive disadvantage.

Just a few weeks ago, the administration saw the TAA battle as surmountable. Now, unless lawmakers reach consensus soon, the trade pacts won’t pass before the August recess, congressional aides say. After that, chances of passage grow slimmer as the 2012 election nears and lawmakers avoid controversial votes.

FULL ARTICLE AT WSJ

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Britain faces a bleak time for the next two years as a result of feeble economic growth, one of the Bank of England’s most senior officials warned on Friday night.

Full Story at the Telegraph

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BOSTON (TheStreet) — A so-called Chinese Wall is supposed to exist between investment banks’ research and asset-management divisions, but recent calls, especially coming from subprime-securites proponent Goldman Sachs(GS_), warrant further scrutiny.

Goldman helped to catalyze the recent commodity sell-off as its researchers expected little upside when the economy hit a soft patch. Crude oil tumbled beneath $100 on that report. Then, two days ago, with few fundamental changes in the demand outlook, Goldman reversed its stance, advising clients to buy.

This flip-flopping from Wall Street’s most closely followed researcher is being perceived by some as client-fleecing since the bank is able to trade in proprietary accounts before it releases research and the markets react, as they often do to Goldman’s calls.

Similarly, many sell-side researchers award stocks “buy” or “overweight” ratings even as their internal asset-management units unload shares, presenting a conflict of interest and ethical dilemma. Goldman’s most famous front-runs to date were the Abacus transactions, through which the bank allegedly postured for high ratings for its mortgage-backed CDOs, sold them to clients and then shorted them.

News broke yesterday, or rather, a blogger pulled data yesterday to show that Goldman dumped 1,260,802 shares of Apple(AAPL_) during the first quarter, even as its research division rated the stock “buy” and maintained its lofty $470 target. Little due diligence is done in the journalism community on the interplay between asset-management and research units.

FULL STORY

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Soaring food and fuel prices have become a substantial burden on households in the United States, the United Kingdom and other economies since September 2010, and may have contributed to a slowdown in growth recently.

The International Energy Agency has warned “additional increases in (oil) prices at this stage of the economic cycle risk derailing the global economic recovery” and called on producing countries to raise the supply of crude.

But leading oil forecasters are divided over whether prices have yet risen far enough to ration demand — via direct effects (substitution, conservation) and indirect ones (falling incomes, slowing growth) — or need to rise further before the market finds a fundamental and geopolitical equilibrium.

THREE KEY QUESTIONS

Three questions are critical for both the global economic outlook and prospects for the oil market:

• Does the sharp rise in oil prices since September 2010 qualify as an oil shock?

• How do oil shocks affect economic performance in the United States and elsewhere?

• How do policymakers understand oil shocks and how will that shape their response?

FULL ARTICLE AT COMMODITIES NOW

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For much of the second half of the 20th century, critics of Wall Street charged that brokerage research was tainted by the tight relationship between analysts and investment bankers.  These well documented “agency” issues remained until April 2003 when leading financial institutions signed a deal with the SEC to reimburse investors and put an end to the cozy relationship between the research departments and i-banking departments of major US financial institutions.  Many thought this put an end to the conflicts of interest that had plagued the industry.  But, apparently, they may have been wrong.

A recent study by Sung-Gon Chung and Melvyn Teo of Singapore Management University provides evidence that analysts have run from the arms of the i-bankers and into the arms of the hedge fund managers.  Write Chung and Teo:

[S]ell-side analysts tend to issue buy and strong buy recommendations on stocks  predominantly held by hedge funds… in a post-Spitzer era, Wall Street research departments having been forcibly weaned off  investment banking revenues now contend with new hedge fund-induced conflicts of interests.

FULL ARTICLE

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Vietnam and the Philippines are pushing forward oil and gas exploration projects in areas of the South China Sea claimed by China, risking clashes in one of the world’s busiest shipping corridors.

State-owned PetroVietnam’s partner Talisman Energy Inc. (TLM) aims to begin drilling next year in a block that China awarded to a U.S. rival and has protected with gunboats. Ricky Carandang, a spokesman for President Benigno Aquino, said the Philippines plans to exploit a field in an area of the sea where Chinese patrol boats harassed a survey vessel in March.

The neighbors of China, which has Asia’s largest military, were emboldened after the U.S. asserted interest in the waters last year, said James A. Lyons Jr., a former U.S. Pacific Fleet commander. A surge in crude prices to near $100 a barrel also spurred Vietnam and the Philippines to pursue the oil needed to meet economic growth targets of at least 7 percent this year.

FULL STORY

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(Reuters) – Britain’s billionaires are more likely than their U.S. counterparts to have made their own money rather than inherited it, a study has found, challenging popular perceptions of greater social mobility in America.

A survey by French bank Societe Generale and Forbes of super-rich people in 12 countries, many of whom are billionaires, found 80 percent of the British sample entirely “self-made,” as opposed to inherited wealth or a mix of both.

FULL ARTICLE

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(Reuters) – The day after bringing its biggest case of oil market manipulation ever, a U.S. regulator warned those trying to rig the commodities markets that they will be hunted down.

“We’re watching and we’ll come and get you,” warned Bart Chilton, a commissioner for the U.S. Commodity Futures Trading Commission.

Chilton’s comments came after Arcadia, one of two firms sued on Tuesday for allegedly reaping $50 million by illegally manipulating oil markets in 2008, pledged to fight the CFTC.

FULL ARTICLE

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It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

FULL ARTICLE

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It is no secret that Zero Hedge follows every utterance by Goldman Sachs (Morgan Stanley, not so much – it is sad just how irrelevant MS has become when it comes to swaying any opinion at all) as pertains to the firm’s outlook on various commodities, simply because by the very nature of the firm’s trading operations, whereby its prop desk (yes, Goldman’s prop desk is alive and well) controls a substantial amount of the actual commodity outstanding (in either paper or physical form) and then advises clients to do the opposite of what the firm itself is doing. In essence: using its economy of scale (or monopoly, however one wishes to define it), Goldman can sway the market this way and that with one simple “client” note. The recent fiasco whereby Goldman downgraded Brent on April 12 only to upgrade it two days ago, using the very same assumptions, is nothing more than just the latest example of what we have claimed over and over is outright market manipulation. Today, we find we are not alone after Oppenheimer’s Fadel Gheit accused the firm of precisely the same thing on Bloomberg TV: “Unfortunately, without repeating the names of the brokers, everybody knows who the usual suspects are. These are the people in 2008 that were making a bet on $200 oil. This is another form of market manipulation in my view. Whether or not they are influencing the market and manipulation could be a stronger word, but they are influencing the market. They are doing things that could be beneficial to them but harmful to the rest of us. That is where government comes in and says stop, enough. You have a Ferrari or a Maserati and can go 120 mph, but guess what? Those of us who can only go 60 miles per hour will be pulverized. That is where the government has to come in and say there is a speed limit here, but that is not happening.” Of course, if Oppenheimer was large enough and influential enough to do what Goldman does, we are 105% confident Fadel would be singing a totally different tune.

FULL STORY AND VIDEO HERE

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ECB’s Noyer Rejects Greek Restructuring as ‘Horror:’ Transcript

The following is a transcript of remarks made by Christian Noyer, governor of the Bank of France and a member of the European Central Bank’s governing council. He spoke to journalists in Paris today.

The first section constitutes a statement made by Noyer. The remainder is from a question-and-answer session. Noyer spoke in French.

“If we restructure Greek debt, that means Greece defaults.”

“And what are the consequences of a default? The banks with the most Greek bonds are Greek banks. The Greek banks themselves will be badly damaged. When the banking system is stricken, what do you have to do to prevent the financing of the economy from collapsing? You have to recapitalize the banks. Who will recapitalize the Greek banking system? The Greek state.”

“That means the Greek state will gain nothing. It will invest in the banking sector everything that it has gained in the restructuring.”

“Next there are the Greek insurers and pension funds” who will be hurt. “That means it will weigh on the Greek population’s savings, which could cause a drop in consumer spending and Greek growth will take a hit. This counters the Greek recovery.”

“Then, what else is there in terms of Greek creditors? There’s the European public sector, European governments and the central banks. This is directly tapping the European taxpayer.”

“If we make European states pay, the mechanism of European financing will stop immediately. The states will not continue putting their taxpayers’ money on the line when their loans have just been cleaned out, when they’re taking losses on the money they’re lending. So that’s the end of support from other European states.”

“And for the central banks, what happens? Greek debt will become debt that is no longer worth anything. It’s no longer debt that can be considered as sufficiently safe for operations in the Euro System. That means by definition that to restructure is to become ineligible as collateral. If it’s ineligible, then it means a large part of what the Greek banks bring as collateral for refinancing can no longer be used. That means the Greek banking system can no longer be financed.”

“The next day what happens? Greece needs to find investors because the Greek state won’t move from deficit to surplus overnight. As long as it doesn’t have a primary surplus, the Greek state needs to borrow. International investors, that small group that remains, have just been restructured. It’s not the next day they’ll come back with financing.”

“The Euro System won’t refinance. The European states won’t finance. The IMF won’t go there alone. No one will finance the Greek state in coming years. That means the meltdown of the Greek economy. This is a horror story. That’s why we’re against a restructuring.”

On rescheduling of debt:

“The lengthening of maturities brings very difficult legal questions. There’s a strong chance it will be the equivalent of a default.”

On austerity, asset sales:

“There is another possibility, which is to apply the program. To reduce the stock of debt, the only solution is ambitious privatization. There is no other solution.”

“When we’re in a monetary union and you need to restore your competitiveness, it is necessary to have the equivalent of an internal devaluation. Cut production costs. There is no other solution.”

“The budget adjustment that is being asked for — they’re difficult measures but they’re doable. The IMF has been doing these programs for years. It knows what is doable.”

“Restructuring is not a solution, it’s a horror story. You have to make decisions that are in the interest of the country and its citizens. The best option is the program.”

“Time isn’t a way of lightening the program. A bit more time may be necessary. The program might be longer. The measures are necessary in any case. It’s the same effort over more time.”

“We won’t convince other European countries or the IMF to provide support unless there is a strict application of the program.”

On the ECB refusing Greek debt as collateral:

“What is the fundamental principle that we have to observe? We must, in monetary policy operations, refinancing, take sufficient guarantees. All the central banks of the world do this. You need good-quality collateral. You set the bar at a certain level. We took a simple rule. You need single-A debt as a minimum.”

“During the crisis, given pressure on assets, we accepted temporarily to reduce our minimum level of collateral to BBB. Then the sovereign-debt crisis arrived, the Greek crisis, ratings cuts for Greece.”

“We decided at that moment that when there is a European Union-IMF program that we support, we considered” the assets “were the equivalent of BBB. If the program is no longer respected, if a country is found off track, immediately our assumption of BBB disappears. If it goes out of the EU program, the collateral is ineligible.”

“If the debt is restructured, you can’t say it’s debt of good quality. We need collateral of very good quality. It’s a simple application of reasoning. Ipso-facto, the collateral can no longer be accepted.”

“Don’t think for a minute that we’re against restructuring because French and German banks have Greek bonds. The problem is for Greece itself.”

To contact the reporter on this story: Mark Deen in Paris at [email protected]

Original story

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Dan Dicker could be forgiven if he hooted in vindication as crude plunged 15 percent in the first week of May. He concluded long ago that petroleum prices have become “just nuts,” as he says in “Oil’s Endless Bid.”

Oil markets are defying the normal laws of supply and demand, he argues in this timely book, and a large share of the blame belongs to Goldman Sachs Group Inc. (GS), Morgan Stanley (MS) and other banks. A longtime floor trader, he brings valuable insights to bear on a contentious subject that affects us all.

Dicker spent 25 years trading crude, natural gas, unleaded gasoline and heating fuel at the New York Mercantile Exchange. Bit by bit, he saw Goldman — “the devil to be feared,” he says — and its Wall Street brethren muscle into a sleepy market that was once dominated by oil companies seeking to hedge the risks of physical assets.

Soon a flood of “dumb money” from investors was gushing into funds pegged to the Goldman Sachs Commodity Index, he says. This high tide of cash, totaling billions of dollars, exerted an upward price pressure on oil that burdens American business and threatens to derail a U.S. economic recovery.

“We are all invested in oil, whether we like it or not,” he writes.

‘Peak Oil’

Dicker understands the prevailing wisdom about high oil prices yet remains unimpressed. Has he noticed how the rise of China and other emerging nations has driven up demand? Yes, he has. Is he ignoring evidence that the planet will one day run out of cheap, easily tapped black gunk? No, he’s not.

He says he believes in “peak oil,” the theory that petroleum production will inevitably peak, plateau and decline. Yet when he examines this and other explanations for recent energy-price spikes — a falling dollar, for example — he concludes that they amount to “a bad alibi.”

His argument, brutally compacted, goes like this: Oil today is overpriced, driven ever higher by the new flow of money funneled through investment banks, energy hedge funds and exchange-traded and index funds. Feeding the frenzy are bets from the same kind of American investors who moan about paying almost $4 a gallon to fill up their SUVs.

This new dynamic has led to wild fluctuations, Dicker says. Remember how oil surged in 2008 to more than $145 a barrel in July, only to plunge to less than $34 by late December?

“Nothing proved a speculative bubble more convincingly than the rapid price collapse we saw then,” he writes.

‘Assetization’

In swaggering prose, Dicker marches us through momentous changes that began rocking oil markets a decade ago. Chief among them is “the assetization of oil,” his infelicitous term for new instruments — think commodity index funds –that make investing in petro prices as easy as buying stocks.

Dicker frowns on this. Just because everyone can now trade oil — Mom, Pop and Aunt Erma, too — doesn’t mean they should, he argues, determined to dissuade the very people who are most likely to buy his book. The notion that we can invest in oil as if it were a stock or bond is “the single most diabolical source of our pricing problem,” he writes.

Oil isn’t a stock or a bond. You don’t get dividends, interest or a way to reinvest profits and compound returns, he explains. All you get is a wager on oil prices — a futures contract with a short shelf life. Your bet “self-destructs every 30 days,” as Dicker says.

Barrels on Doorsteps

Many people, heeding the growth of emerging nations, peak- oil arguments and the upheaval in Libya, are betting oil will go up. Being accustomed to stocks, they want to buy and hold. The only way to do that, unless you want a contract for 1,000 barrels of oil delivered to your doorstep, is to roll your position over by retiring an old contract and initiating a new one with a later expiration date.

This may expose you to a tax liability, not to mention commissions and fees on two trades (for getting out and getting back in). Imagine, too, what happens when commodity index funds roll their positions all at once, as they do on certain days each month. This mechanical reset is called the Goldman Roll, after the Goldman Sachs Commodity Index. It winds up amplifying any fundamental arguments for higher prices, Dicker says.

Can this be fixed? Yes, says Dicker, though his solution would mean forbidding most individuals from trading oil (and handing some clout back to pros such as himself). If he had his way, commodity index investing would be banned, along with exchange-traded funds that engage in futures.

Nostalgia for “the good old days of oil trading” tinge this book, which is enlivened with memories of “standing shoulder to shoulder with another 120 sweaty, smelly traders.” Yet it’s the future, by this account, that may really stink.

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Washington, 24 May 2011: Reuters

The U.S. Congress should take steps to limit speculation in oil markets, which has boosted prices as much as 30 percent, a new report from the Democratic staff of a House of Representatives oversight committee said on Monday.

The report, based on data and comments from industry experts, cites comments from Exxon Mobil CEO Rex Tillerson and others that oil should be around $60-$70 a barrel based on the fundamentals of supply and demand.

“Addressing excessive speculation offers the single most significant opportunity to reduce the price of (gasoline) for American consumers,” according to the report, prepared for Democrats on the House Committee on Oversight and Government Reform, which has broad oversight of government policies.

The staff report, which also backs other positions championed by minority Democrats including eliminating oil company subsidies, is unlikely to gain much traction in the Republican-controlled House. It argues that Republicans proposals such as steps to boost domestic offshore drilling, would not achieve the goal of reining in $4 gasoline prices.

With national elections next year, members of Congress have been arguing about the best way to combat high gasoline prices, a top concern of voters. While Republicans have focused on increasing domestic oil production, many Democrats have called for cracking down on market manipulation.

“With gas prices skyrocketing to more than $4 per gallon, it is time to stop focusing on advancing the priorities and profits of oil companies and instead find ways to give American consumers relief at the pump,” said Rep. Elijah Cummings, Maryland Democrat, the ranking committee member.

The report says increasing domestic drilling would “impact prices by only about 1 percent.” It cites data from the U.S. Energy Information Administration, saying drilling on the Atlantic and Pacific coasts of the United States would have little impact on global prices by 2020.

The Oversight Committee, chaired by Republican Congressman Darrell Issa, is set hold a hearing on Tuesday on factors affecting gasoline prices in the world’s largest oil consumer.

RECORD SPECULATION

“In order to make the most significant impact on lowering gas prices, the committee’s primary focus should be on countering the growing impact of excessive speculation, rather than pursuing the oil industry’s priorities of increasing domestic drilling or repealing safety measures put in place after the devastating BP oil spill,” the report said.

Big hedge funds and other speculators had increased their bets on higher prices to an all-time record level at the end of April, according to data from the U.S. Commodity Futures Trading Commission.

Data shows money managers had accumulated contracts equivalent to around 350 million barrels of U.S. crude oil, or four days of global consumption, with a notional value of more than $38.5 billion.

U.S. benchmark crude, known as WTI or West Texas Intermediate , hit a post-2008 high of $114.83 on May 2, before tumbling more than 10 percent in one session three days later.

Many experts said the steep decline on May 5 came as funds liquidated long positions, demonstrating the outsized impact investment flows have on commodity prices.

So far in May, speculative bets on higher oil prices have been reduced by around a quarter, but remain at a level never seen before the start of this year. WTI crude prices have fallen by around 15 percent in May, to trade around $97.50 on Monday. High gasoline prices have cut U.S. President Barack Obama’s approval ratings. He has set up a working group of federal agencies to investigate possible market fraud.

More than a dozen senators, including one Republican, have called on the CFTC to unveil a plan by Monday to impose position limits for speculators in energy futures markets. CFTC chairman Gary Gensler fell short of that goal. In a letter late on Monday to the senators, he said that commission staff will “shortly” complete its review of almost 12,000 comments on the agency’s proposal from January to put position limits on 28 commodities, including crude oil.

“The commission will begin considering a final rulemaking after staff can analyze, summarize and consider comments and after the commissioners are able to discuss the comments and provide feedback to staff,” the letter said.

Gensler did not say in the letter, which was also written on behalf of commissioners Michael Dunn and Scott O’Malia, when a final rule might be issued imposing position limits. Commissioners Jill Sommers and Bart Chilton did not sign on to the letter.

Chilton, an outspoken proponent of position limits, said in a separate letter to the senators late last week that he agreed “wholeheartedly” with their position. “I believe we are fully capable of enacting a position limits rule that does not harm markets, or harm legitimate business activity,” Chilton said.

—

FULL ARTICLE LINK

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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.”

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