Swiss National Bank (SNB) Monetary policy report 2005

Although the growth forecasts for the euro area and the US were almost unchanged from the September monetary policy assessment, the SNB expressed confidence on the outlook for the global economy. For 2005, it continued to work on the basis of a European growth rate of 1.4%, and for 2006, 2%, while its growth assumptions for the US were lowered slightly, to 3.5% for 2005 and 3.6% for 2006. In view of the vitality of the US economy, the National Bank forecast growth of about 3.5% in 2007. The SNB was also optimistic about developments in the euro area, projecting a growth rate of 2.4% in 2007. As compared to the situation at the previous monetary policy assessment, world oil markets had eased somewhat. Consequently, the National Bank no longer regarded oil prices as having the potential to hold back the industrialised economies, although it assumed that the price level would remain high over the next few quarters.

Unlike the September monetary policy assessment, when the SNB was still expecting the Swiss economy to grow by only 1% in 2005, at the December assessment it revised its forecast upwards to just over 1.5%. First, seco’s revised GDP growth rates for the first two quarters supported a more optimistic evaluation. Second, both consumption and equipment investment were strong in the third quarter, and positive developments could be expected in the next few quarters. This scenario would not be affected by the levelling off in construction investment expected in 2006. Economic activity at the end of the year was a further factor supporting the National Bank’s confidence in the outlook for 2006. Given this situation, the SNB forecast GDP growth of a little more than 2%.

Monetary indicators also pointed to an improvement in the economic situation. The trends that had emerged at the September assessment were further reinforced shortly before the December assessment. There was an additional acceleration in the movement of the M1 and M2 aggregates that had persisted since August. M3 grew even more strongly. In October 2004, its rate of growth was just 1%, while at the monetary policy assessment it came to more than 6%. The SNB also devoted special attention to real estate, an area which remained very active.

As at the previous monetary policy assessment, the National Bank forecast inflation of 1.2% for 2005. On the assumption of an unchanged Libor of 0.75% in the following three years, the December forecast for inflation in 2006 was revised upwards from the rate forecast at the September assessment. By the end of the forecast period, inflation would amount to 3%, considerably above the limit of the range that the SNB equates with price stability.

Given this situation, the Governing Board decided to increase the target range for the three-month Libor by 25 basis points, to 0.50–1.50%, and to hold the Libor in the middle of the target range for the time being. At the beginning of the year, with the considerable improvement in the medium and long-term inflation outlook, the National Bank had suspended the normalisation of its interest rates. At the monetary policy assessment in September 2005, it had again decided against increasing the interest rate. While the improvement in the inflation outlook appeared to be petering out, a sudden rise in the oil price created uncertainty with respect to economic prospects. In December, the need for action became more urgent with the upturn in the global and Swiss economies. As a result, the SNB resumed normalisation of its monetary policy course.

Assuming an unchanged three-month Libor of 1% for the next three years, the Governing Board forecast annual inflation of 0.8% in 2006, 1.2% in 2007 and 2.7% for the end of the forecast period. This would still be above the limit of the range that the National Bank equates with stability. Thus, monetary policy remained expansionary and continued to support economic recovery.