Rates on the rise

The Swiss National Bank (SNB) is in a tightening mode, driven by inflationary concerns in the wake of its currency’s weakening trend. “

The SNB has for some time warned they were concerned by the weakness in the Swiss franc caused by its status as a funder for the carry trade,” Powell says. “The concern is that weakness in the Swiss franc vs. the euro could result in an increase in import prices, which could lead to a general rise in inflation.”

Inflation jumped from the February 2007 CPI reading of unchanged (year-over-year) to the latest July data of a 0.7 percent increase year-over-year. The SNB targets CPI less than 2.0 percent.

“Inflation at this stage is not a problem, but import prices have been rising,” Powell says. “The June import price index was up 3.4 percent year-over-year.”

The SNB last hiked rates 25 basis points in June, pushing the target rate to 2.5 percent. The central bank is set to meet next on Sept. 13 and again on Dec. 13. Currency strategists generally expect the SNB could pull the trigger on two more 0.25-percent rate hikes by year-end, pushing the target rate to 3 percent.

The rising rate environment, however, will likely decrease the attractiveness of the Swiss franc as a funding currency.

“The franc is expected to strengthen against the U.S. dollar and the euro through the second half of 2007, with the unwinding of carry-trade activity the primary driver,” says Melanie Averall, economist at Moody’s Economy.com.