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The Swiss central bank may hold its key interest rate near zero and keep measures in place to fight the risk of deflation even as the economy shows signs of emerging from recession.

The Swiss National Bank, led by Jean-Pierre Roth, will leave the three-month Libor target at 0.25 percent at today’s quarterly monetary policy assessment, according to all 21 economists in a Bloomberg News survey. The SNB publishes the decision in Zurich at 2 p.m., when it will also release a policy statement.

Switzerland’s worst economic slump in three decades has been compounded by the strength of the Swiss franc, which has fueled the risk of deflation by making imports cheaper. In March, the SNB started buying corporate bonds and foreign currencies in a bid to weaken the franc and prop up consumer prices, which it predicts will fall 0.5 percent this year.

“The specter of deflation hasn’t been banished yet,” said Martin Gueth, an economist at Landesbank Baden-Wuerttemberg in Stuttgart. “The SNB will still be on its guard, although it has made some progress.”

The economy, the eighth largest in Europe, has been contracting since the third quarter of last year as the global recession curbs demand for exports, which account for about half of Swiss gross domestic product. GDP dropped 0.3 percent in the second quarter after plunging 0.9 percent in the first.

Risks Prevail

“The risks of deflation still prevail at the moment,” SNB Governing Board member Thomas Jordan said on Aug. 25. The bank “will continue its expansive monetary policy” and interest rates will “remain low,” he said.

Switzerland’s status as a haven during times of crisis buoyed the franc even as its economy slumped. It appreciated 7 percent in the year to March 11. Since the SNB started intervening in currency markets on March 12, the franc has weakened 2.7 percent. It traded at 1.5187 per euro yesterday.

Switzerland’s ABB Ltd., the world’s largest builder of electricity grids, on Sept. 11 predicted growth will continue to come from emerging markets, with India representing an order potential of $10 billion in the years to 2012 freecreditreport.

Some economists expect the Swiss economy to return to growth in the current quarter. Exports gained for the first time in three months in July, Switzerland’s leading economic indicators rose to the highest level in nine months in August and manufacturing expanded for the first time in a year.

Economic Forecasts

Producer and import prices also fell at a slower rate in August, adding to signs the risk of deflation is abating.

“It seems likely that the SNB will raise their forecast for the economy and inflation,” said Fabian Heller, an economist at Credit Suisse Group AG in Zurich. “However, they will emphasize that uncertainties still remain.”

At its last monetary-policy meeting in June, the SNB maintained its forecast for the economy to contract as much as 3 percent this year and said GDP will start to rise only “gradually” during 2010. It raised its longer-term inflation outlook, predicting average consumer-price increases of 0.4 percent next year and 0.3 percent in 2011.

The SNB sets a target range of the three-month Libor interbank lending rate and generally tries to steer Libor toward the mid-point of the range. Since March it has aimed for the lower part of a zero-to-0.75 percent range, or 0.25 percent.

The spread between the SNB target rate and the three-month Libor rate has narrowed to 5 basis points from 15 basis points in June, indicating banks are becoming more comfortable about lending to each other.

“It’s too early for the SNB to remove their measures, but there’s no need to strengthen them either because the risk of deflation has clearly faded,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “What they will do is stick to their policy and wait and see.”

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Filed under: money by Finance Boss