Swiss National Bank (SNB) Monetary policy decisions 2006

At each monetary policy assessment, the SNB bases its inflation forecast on the global economic scenario it regards as most likely.

In general, the hypotheses for the global economy at the first assessment in 2006 were similar to those of December 2005. Once again, the SNB forecast a robust global economy. Although-fourth quarter GDP growth in the US in 2005 had failed to meet the expectations of the previous assessment, the SNB still forecast strong growth for 2006, predicting a rise of over 3%. In the euro area, economic growth was shaping up more favourably than had been expected in the previous forecast. Consequently, the SNB forecast growth of approximately 2.5% for 2006. With regard to oil, it continued to work on the basis of high prices for the quarters ahead.

Since, at the time of the March assessment, the Swiss economy was progressing as expected, the SNB continued to forecast GDP growth of a little above 2%, as it had done in December 2005. The economy was likely to gain a little more strength and become even more broad-based. Thanks to the favourable development in sales in the main export countries, exports were likely to continue growing, albeit at a less buoyant pace. The higher level of capacity utilisation in manufacturing would probably again stimulate investment and increase demand for equipment. Only construction was expected to weaken a little, given its high level. An upturn in consumption and an improvement in the labour market were also likely.

Monetary aggregates react rapidly and clearly to interest rate decisions. Consequently, growth in the aggregates slackened following the rate increases in 2004 and December 2005. The money overhang generated during the period of extremely expansionary monetary policy stopped advancing after the interest rate hikes, while the growth in the volume of loans stabilised at a relatively high level. Furthermore, the SNB continued monitoring movements in the real estate market, in particular mortgage loans, which were still climbing at a rate of over 5%.

At the time of the March assessment, the increase in prices was mainly attributable to the price of oil. At that time, the SNB was forecasting an average annual rate of inflation of 1% for 2006. As compared to the December assessment, the inflation outlook was adjusted upwards. In these circumstances, the Governing Board decided to lift the Libor target range by 25 basis points to 0.75–1.75%.

Assuming that the new Libor was maintained unchanged at 1.25% for the following three years, the SNB forecast inflation to be higher than that predicted at the previous assessment until the end of 2006, as can be seen from the graph published at the time of the March assessment. The assumption of a high price for oil and the slight increase which was shaping up for the prices of imported goods contributed to this inflationary pressure in the early part of the forecast period. For the period 2007–2008, however, the new forecast showed a lower path than the previous forecast. At the end of the forecast period, expected inflation again exceeded the upper limit which the SNB equates with price stability.