Citigroup expects Swiss rate hike

The Kof economic Barometer rose to 1.96 in May after 1.90 in April (not revised). The May figure is slightly above Citigroup forecast, and the consensus, of 1.95. For the fifth month in a row, the Kof economic barometer remained on its upward trend in May, rising to its highest level since October 2006. The May increase primarily reflects stronger exports to the EU, while, in turn, the industrial activity assessment declined (mainly because of softer easing business expectations). The Kof is a fairly good lead guide to the Swiss economic activity (with a 6-months lag), and hence its recent developments suggest a modest acceleration of GDP in H2-2007.

The strength of growth will heighten the SNB’s worries about inflation risks from currency weakness. Until recently, the SNB was rather relaxed about CHF weakness, regarding it as a useful source of rebalancing and an antidote to risks of an extended inflation undershoot. However, following stronger CPI inflation and the recent rise in non-energy import prices, the SNB recently has sounded more worried about medium term inflation pressures from CHF weakness. For example, both Roth and Jordan made rather hawkish comments early this week and SNB member Jordan Thomas argued that “the need for adjustment of monetary policy is not yet over” and that “the weakening of the Swiss franc will certainly play a role” in the SNB’s monetary policy statement next June 14th.

There are still some data to go between now and the next SNB policy meeting (June 14). But, as things stand, analysts at Citigroup expect both a 25bp hike (from 2.25% to 2.5%) and for the SNB to raise their near-term inflation forecast, hence setting stage for a further couple of hikes (to 3.0%) by yearend.