ZURICH: Switzerland's economy should pick up steam this year despite the strong Swiss franc, prompting the Swiss National Bank to raise interest rates in mid-2011, the KOF (Index of Globalization) economic institute said on Friday.
It forecast Swiss GDP would grow 2.8 percent in 2011, accelerating slightly after 2.6 percent growth last year, adding that the franc's appreciation seems to have hampered the upturn less than expected.
"The Swiss economy is growing vigorously thanks to a robust domestic economy and high foreign demand," the Zurich based KOF said. "In light of the positive economic outlook, the KOF expects the Swiss National Bank (SNB) to initiate the turn in the interest rate cycle towards the middle of this year."
At a policy meeting on March 17, the SNB raised its 2011 growth forecast to around 2.0 percent.
Interest rate futures fully price in a quarter point hike in the three-month Swiss franc LIBOR target to 0.5 percent in December, with a chance of a move in September.
Export growth will slow to 3.5 percent this year because of the franc's strength, which has also squeezed companies' margins, the KOF said.
The KOF said it sees no inflation threat to the Swiss economy because the strong franc and intense retail competition will keep a lid on food prices.
It sees inflation at 0.7 percent this year and 1.2 percent in 2012 when the franc will weaken slightly and economic activity will see a further upswing.
The SNB dropped any reference to deflation risks in its statement on March 17 and said interest rates could not stay at rock bottom forever, with inflation set to breach the bank's price stability threshold of 2 percent by mid-2013.
The KOF warned that the earthquake in Japan, unrest in the Arab world, the European debt crisis and the high budget deficits in the United States could affect the Swiss economy.
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