The National Bank’s inflation forecast on 16 December 2004 was based on a Libor of 0.75%. At that time, the SNB forecast annual inflation of 1.1% for 2005, taking account of an increase in oil prices as well as a higher valuation of the Swiss franc against the dollar. The stronger Swiss franc meant a tightening in monetary conditions and thus a lower inflationary impact from the increase in oil prices. For 2006 – in the medium term – the SNB now predicted a lower inflation rate of 1.3% averaged out over the year and 2% at the end of the year. This adjustment to the previous quarterly assessment was due to the expectation that the closure of the output gap would be delayed. In the longer term, finally, the forecast reflected lower inflationary pressure than had been assumed for the same period during the course of 2004. The easing in the situation was mainly due to the absorption of the liquidity surplus that had begun in summer 2004.
After raising the Libor twice, in June and September 2004, the Governing Board decided in December to leave the target range unchanged at 0.25–1.25%, and to keep the Libor at 0.75%. Since inflationary pressure was expected to lessen, the National Bank did not see any need to take a further step towards the normalisation of interest rates. Apart from these considerations, monetary conditions were already tighter because of a stronger Swiss franc. Despite this, monetary policy at the beginning of 2005 remained expansionary. The National Bank nevertheless noted that, in view of the inflation anticipated in the long term, the normalisation of interest rates begun in mid-2004 had not been completed.