Forex

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At the last rate setting meeting in December the bank also decided to keep rates on hold.

The three-month Libor rate range will be kept at 2.25-3.25 pct, with the central bank saying it intends to keep the middle of the target range at 2.75 pct.

The vast majority of economists had expected the SNB to keep rates on hold.

In parallel, the central bank reduced its GDP forecast for 2008 to 1.5-2.0 pct, from its previous forecast of 2 pct in December, saying that the international environment will probably result in a slowdown in economic activity in Switzerland.

'Despite its strong international integration, the Swiss economy at this points, is little affected by slower growth in its main export markets', and with a GDP growth of 3.1 pct last year clearly exceeded its long-term average growth figure for the fourth year in a row.

In the current economic environment, the SNB can therefore afford to maintain its cautious stance and leave its monetary policy unchanged 'given the favourable inflation outlook in the medium term', it said.

Based on an unchanged Libor of 2.75 pct, it expects inflation to ease toward the end of the year, with the average annual inflation likely to amount to 1.4 pct in 2009 and 2010.

However, due to a sharp increase in energy prices, the inflation forecast for the current year has been adjusted upwards, and is now seen at 2 pct, compared to 1.7 pct previously, it said.

'Even though the recent rise in inflation did not come as a surprise, it was underestimated,' the SNB said.

Moreover, 'a further rise in the oil price could result in yet a further deterioration in this forecast,' it warned.

The SNB said that both the downside and upside risks are currently higher than usual, and that it will closely watch developments in the financial markets, the global economy, the price of oil and the Swiss franc.