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ECB rate move opens door for Swiss tightening

Published 04/07/2011, 09:42 AM
Updated 04/07/2011, 09:44 AM
UBSN
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* ECB raises rates for first time since mid 2008

* Move may lead SNB to tighten earlier than expected

* Futures price in SNB move in Sept, slight chance in June

By Catherine Bosley

ZURICH, April 7 (Reuters) - The European Central Bank's interest rate rise on Thursday opens the way for the Swiss National Bank to tighten too -- possibly as early as June -- by taking some pressure off the red-hot franc.

Despite the economy's strong rebound from the crisis, robust consumer spending and a booming real estate market, the SNB has held off raising its target for the three-month Swiss franc LIBOR -- which has been at 0.25 percent since March 2009.

But the ECB's rate rise -- its first since July 2008 -- gives the SNB more leeway as it lessens pressure on the safe-haven franc, which soared 15 percent last year to a record against the euro during the euro zone debt crisis.

The Swiss franc slipped slightly against the euro after the ECB decision but rose again after ECB President Jean-Claude Trichet said the hike was not necessarily the first in a series.

Swiss interest rate futures were flat, fully pricing in a hike in September with a slight chance of a June move. While the franc hit a new all-time high of 0.8963 per dollar in the wake of Japan's earthquake last month, it has fallen more than 5 percent against the euro from a record high hit on Dec. 30. The euro zone is Switzerland's biggest trading partner.

"It will be interesting to see whether the ECB will hint at another rate hike before the summer break. Any such outcome would further increase the pressure on the SNB to act," said UBS economist Reto Huenerwadel, who sees the SNB hiking in June.

"They have to be careful about signalling tightening expectations at an early stage as this could have an impact have on the franc," he said.

"Consequently, they will wait to announce something and carefully look at the next inflation numbers, growth and jobs."

The franc jumped on Wednesday after data showed Swiss inflation rose more than expected in March.

The International Monetary Fund (IMF) has said the SNB should be in a position to tighten in the near-term, barring any more shocks.

In a newspaper interview, SNB board member Jean-Pierre Danthine said monetary policy was appropriate for the economy as a whole, but the SNB would hike rates if it were to look solely at the buoyant real estate market or the domestic economy.

He also said an ECB rate rise would make the SNB's job easier by taking the pressure off the franc.

SNB vice-chairman Thomas Jordan said last month the franc's rise was tightening monetary conditions and limiting the central bank's room for manoeuvre.

The SNB's next monetary policy meeting is in June. It kept interest rates ultra-low at its March quarterly monetary policy meeting, citing risks from Europe's debt crisis and the Japan disaster. But the central bank dropped any reference to deflation risks and raised its growth and inflation forecasts. (Additional reporting by Emma Thomasson; Editing by Ron Askew)

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