Monetary policy report 1997
1. Announcement of a continued generous monetary policy.
At the end of 1996 we had announced that we would continue implementing a generous monetary policy. This happened against the background of an unfavourable economic situation and the possible implications of European monetary integration. We also referred to the strong growth of the money stock and emphasised the associated risks for price stability in the medium term.
2. Abundant supply of money
In 1997, in addition to the development of the money stock aggregates, we paid special attention to the exchange rates and the course of economic activity. Until late summer we kept the supply of money abundant in an endeavour to prevent a rise in money market rates and thus to counteract an appreciation of the Swiss franc. When the signs of a clear economic revival increased the question arose whether our generous monetary policy was still appropriate. We aimed at normalising the situation and therefore permitted the rise in money market rates that set in after the German Bundesbank had lifted the repo rate in October. We took care, however, that the money market rates remained below 2%. Given the higher valuation of the Swiss franc in the wake of the financial crises in East Asia, we again relaxed monetary policy in November. Money market rates subsequently declined.
3. Surprisingly strong expansion of the monetary base
While economic growth and inflation largely conformed to our expectations in 1997, the monetary base expanded more markedly than anticipated. This was partly due to the decline interest rates on savings accounts, which fell from an average of just over 2% at the beginning of the year to 1.6% in October, thereby stimulating the demand for banknotes. To this was added a massive increase in the circulation of one-thousand-franc notes for reasons largely unknown. Since the banks' sight deposit holdings at the National Bank also rose somewhat more strongly than initially envisaged, the seasonally-adjusted monetary base expanded by 3.1% between the fourth quarter of 1996 and the fourth quarter of 1997, exceeding its medium-term target path by 3.6%.
4. Overstated degree of monetary expansion
The shift in the demand for banknotes led us to assume that the rise in the monetary base overstated the degree of monetary expansion. Similar shifts in demand had already been observed in 1996. These were due mainly to the endeavours of some banks to switch their liquid funds from postal cheque accounts to sight deposit accounts at the National Bank. The shifts which occurred in 1996 and 1997 explain to a considerable extent the deviation of the monetary base from the medium-term target path.
5. Normalisation in growth of the broadly defined monetary aggregates
Due to the uncertainties with which the interpretation of the development of the monetary base in the past two years was fraught, we set our sights increasingly on the broadly defined monetary aggregates, notably on M3. At the end of 1995, the growth of M3 had clearly accelerated as a result of our generous monetary policy. The strong expansion of M3 gradually gave way to normal conditions in the course of 1997. In the fourth quarter, M3 exceeded the previous year's level by 3.5%. This growth rate is in a range which is in conformity with price stability in the long run.