Despite the decision taken on 15 December to raise the three-month Libor by 25 basis points, monetary policy remained expansionary throughout 2005. The normalisation of interest rates that began in summer and autumn of 2004 was suspended in 2005. On many occasions the National Bank had indicated that the interruption in interest rate increases, maintained since December 2004, would only be temporary. However, the major challenge in 2005 was to determine the moment when the interest rate should be lifted again.
The first signs of a vigorous recovery in the Swiss economy were already evident in spring 2004, when the National Bank initiated the process of raising its interest rates. However, the upswing faltered at the end of 2004 and economic activity grew only hesitantly in the first half of 2005. In view of a global economy rendered erratic and unpredictable due – in particular – to the listless economy in Europe and the record levels of oil prices, growth forecasts for Switzerland were adjusted downwards during the course of 2005. The slowdown, while linked to a favourable inflation outlook, caused the National Bank to maintain the Libor at the level of September 2004 throughout the first three quarters of 2005.
… and increase in Libor in December
The National Bank raised its interest rates in December, at the final monetary policy assessment of the year. By making this one-year break, the SNB had demonstrated its flexibility. Taking account of the declining long-term inflation risks, it had utilised the greater degree of leeway available to it for maintaining an expansionary monetary policy. Nevertheless, it had monitored developments carefully throughout the year, as is evident in the monetary policy assessments undertaken in March, June and in particular September. It acted promptly once the indications of a robust and sustained economic recovery had finally consolidated.