Swiss National Bank (SNB) Monetary policy decisions 2006

At the December assessment, the most important international development was the substantial decline in the price of oil. This drop halted an upward trend that had been almost unbroken since 2004. As a result, the National Bank forecast downward pressure on inflation in most economies over the next few quarters. The SNB did not believe that the impact on the global economy would be particularly great since oil prices were still high, in historical terms. Otherwise, the international economic trends observed in the previous assessment – a slowdown in the US and strong growth in Europe – were unchanged at the time of the December assessment. Consequently, the SNB forecast growth of 2.9% in the US and 2.3% in Europe in the year 2007, and 3.3% in the US and 2.2% in Europe in the year 2008.

As at the previous assessment, economic activity in Switzerland was assessed favourably. The effects of the economic upswing, which was broadbased, spilled over into the labour market, and the SNB expected the rate of unemployment to drop below 3% as early as the beginning of 2007. Again in 2007, all the components of demand would probably continue rising, although the rate of increase would be a little more restrained than had been expected in September. Consumption was likely to join exports and equipment investment (spurred by the high level of capacity utilisation in manufacturing) as one of the most important growth drivers in 2007. In these circumstances, the SNB confirmed its forecast of about 3% growth in 2006 and 2% in 2007.

Of the monetary aggregates, M3 expanded to about 2% at the time of the assessment, while M1 and M2 continued their downward trend. Clearly, movements in these aggregates were again being influenced by the interest rate increases. Growth in mortgage loans was below 5% at the end of the year, confirming expectations of a slowdown in their growth momentum. Therefore, the SNB was still anticipating a return to a period of greater calm in the real estate market. Based on movements in the monetary aggregates, the National Bank was also expecting a slowdown in other types of loan for the upcoming quarters, despite their liveliness at the time of the assessment.

The inflation outlook was good for the time being. Both oil price developments and the interest rate hikes were holding back price increases. Consequently, the National Bank lowered its average annual inflation forecast for 2006 slightly, to an average of 1.1%. Nevertheless, the SNB decided to continue its gradual normalisation of the target rate of interest, and lifted the Libor target range by 25 basis points to 1.50–2.50%. In doing so, its aim was to avoid excessive use of resources in the years 2007 and 2008, thereby exercising a moderating influence on inflation in the medium term.

The curve for the new inflation forecast, drawn up on the assumption of an unchanged Libor of 2% over the next three years, was well below that published in September. This change was attributable mainly to the new, higher level of the Libor, but also to the drop in oil prices. Average inflation was expected to amount to 0.4% in 2007 and just under 1% in 2008. Thus, the inflation forecast showed that there was no inflationary risk in the short term. However, towards the end of the forecast period the inflation curve showed a clear upward trend. This reflected the fact that monetary policy was still expansionary in view of the expected development of the Swiss economy.