Swiss National Bank seen maintaining gradualist approach to rates

The decline in inflationary pressures in Switzerland will allow the central bank to maintain its slowly-slowly approach to rate hikes. In data out this morning, it was revealed that Swiss CPI dropped 0.2 pct in September from August reflecting lower petrol and fuel prices. The annual rate declined to 0.8 pct from 1.5 pct. "Obviously with headline inflation running below 1.0 pct it will be difficult for the Swiss National Bank to justify a more aggressive tightening pace in December so another gradual 25 basis points looks increasingly likely," said Henrik Gullberg at CALYON. The central bank next decides on interest rates in December and is expected to continue hiking rates by a quarter point after similar increases in June, March and December. The benchmark three-month Libor rate range now stands at 1.25-2.25 pct. The central bank's policy is to keep the rate in the middle of the target range, at 1.75 pct. The moderation in the headline figure masks a pick-up in domestically generated inflation, suggesting a gradual improvement in the pricing power in the domestic economy, in contrast to prices on foreign goods and services, said Gullberg. But as long as imported inflation weighs significantly on headline prices, the Swiss National Bank can afford to maintain its gradualist tightening approach, he added. Matthew Foster-Smith at Thomson Ifr Markets noted that Swiss pricing pressure remains benign and as such the Swiss National Bank can keep to its quarterly rate hikes of 25 basis points. He believes the hike will be the last in this cycle. "Although the data is not deflationary on the surface it does suggest that the longer-term outlook will turn to Roth & Co. (SNB chairman Jean-Pierre Roth) looking to keep rates on hold into the first quarter 2007," he added.