Sept. 2 (Bloomberg) -- Switzerland's economic expansion unexpectedly accelerated in the second quarter and inflation eased last month, reinforcing the case for the central bank to keep interest rates unchanged.

Gross domestic product, the value of all goods and services, rose 0.4 percent from the first quarter, when it increased 0.3 percent, the State Secretariat for Economic Affairs in Bern said today. Economists expected growth to slow to 0.2 percent, the median of 19 forecasts in a Bloomberg News survey showed. August inflation unexpectedly slowed to 2.9 percent from 3.1 percent.

Growth in emerging markets including India and China is fueling demand for exports like power networks and machinery while the lowest unemployment in six years is boosting Swiss spending. Swiss exporters may see sales growth evaporate as the economies of the country's main trading partners cool. The 15-nation euro-area economy shrank in the second quarter and its manufacturing and service industries contracted in August.

``It's amazing we didn't see the same effects in Switzerland that we saw in Europe from high oil prices and slower global growth,'' said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. ``There's no case for rate cuts in September. The SNB doesn't need to act right now.''

The Swiss National Bank kept its key rate at a six-year high in June as it balanced risks to growth and inflation. At 2.75 percent, Switzerland's benchmark rate is the third lowest among major economies after Japan's 0.5 percent and the U.S.'s 2 percent. The SNB holds its next monetary policy meeting Sept. 18.

Prices Drop

Consumer prices fell 0.3 percent from July and core inflation, which excludes food, tobacco, fuel and seasonal products, rose 1.4 percent from a year earlier and increased 0.2 percent from June. From the second quarter of last year, the economy grew at a rate of 2.3 percent, down from 3 percent in the previous three months, today's report showed.

Slower growth and the 20 percent drop in the cost of oil from a record $147.27 a barrel on July 11 may ease price pressures. Swiss leading economic indicators declined to the lowest in five years in August and a consumption indicator fell to the lowest since December 2006.

``What's worrying is that we have quite a significant slowdown in investments and a build-up of inventories,'' Poser said. ``Those two things will weigh on growth going forward. We're probably in for a phase of below-potential growth.''

Investment contracted by 0.7 percent in the second quarter after growing the first three months of the year, today's report showed. Equipment purchases fell by 0.9 percent from the previous quarter while construction declined 0.3 percent.

Company spending on construction slid 0.5 percent from the first quarter, when it decreased 0.3 percent, today's report showed. Imports rose 3.8 percent from the previous quarter, when they declined 3 percent. Exports grew 3.6 percent and consumption expanded by 0.7 percent.

In the year, the economy will probably grow between 1.5 percent and 2 percent after expanding 3.3 percent last year, the central bank forecasts.

To contact the reporter on this story: Joshua Gallu in Zurich at jgallu@bloomberg.net

Last Updated: September 2, 2008 03:04 EDT