UPDATE 1-Swiss manufacturing growth at 3-yr low, costs soar

(Adds details, analysts' comments, background)

By Sven Egenter

ZURICH, Aug 4 (Reuters) - Growth in Switzerland's manufacturing sector slowed to the lowest pace in 3 years in July, the Swiss Purchasing Managers' Index showed on Monday, while cost pressures continued to increase. The PMI showed the strongest rise in input prices in over 13 years, supporting views that the Swiss National Bank had little room to lower interest rates.

The Credit Suisse/SVME PMI fell to 54.1, the lowest level since August 2005, from 54.9 in June, Credit Suisse said. But the index, which is based on a survey of manufacturers, stayed above the median forecast of 53.3 in a Reuters analyst poll.

(For details of forecasts please double click on ECONCH)

"This is the first time since mid-2005 that the PMI has fallen below its long term average of 54.5 points," said Credit Suisse, which compiles the index together with the Swiss SVME purchasing managers' association.

But the index stayed above the 50 level which separates growth from contraction for the 41st month in a row, pointing to a soft landing for Swiss industry, Credit Suisse said.

The PMI showed that companies kept production increases at the June level and new order inflows even picked up slightly.

"The index indicates continued, albeit moderating, growth in the Swiss manufacturing sector, in sharp contrast to the second month of contraction seen for the euro zone sector," said 4Cast analyst Saara Tuuli.

Switzerland's key KOF growth barometer fell for a 12th month running in July, hitting a 5-year low as fading export demand and banking woes start to dampen consumer spending.

Manufacturers such as ABB (ABBN.VX) with a strong foothold in emerging markets have powered ahead, but others suffered from the U.S.-led slowdown in industrialised countries.

Swiss glue and specialty chemicals maker Sika (SIK.S) cut its 2008 outlook, saying that the weak dollar and high raw material prices were also hurting business.

COST WOES

The PMI highlighted the cost pressures which limit the SNB's leeway to support the cooling economy by cutting rates, with the price index hitting the highest since January 1995 at 78.0.

"Already potent, price pressures on the raw materials and input markets heightened further over the month just ended," Credit Suisse said.

The SNB, which expects economic growth to slow to between 1.5 and 2.0 percent from 3.1 percent last year, kept its target rate for the 3-month Swiss franc LIBOR unchanged at 2.75 percent in June, saying the economic slowdown should dampen inflation.

"The SNB are likely to continue their wait-and-see approach as relatively risks are weighed up and hence we expect to see rates on hold till year end," 4Cast analyst Tuuli said.

Other analysts see a strong influence from the European Central Bank's rate decisions.

"If the ECB raises again the SNB might follow, just to keep the difference in short-term interest rates from widening too much," UBS analyst Reto Huenerwadel said.

The ECB is expected to keep the main euro zone rate at 4.25 percent at its August policy meeting on Thursday. (Reporting by Sven Egenter; editing by David Stamp)