Swiss National Bank (SNB) Monetary policy decisions 2007

The international environment at the time of the September assessment was dominated by the mortgage loans crisis in the US, a major correction on the stock market and the liquidity shortfalls on the money market. For the time being, the global economy did not appear to have been affected. Growth in the US economy was only very slightly weaker than expected, but the risks of a slowdown at the end of 2007 had risen. Moreover, after having fallen back between mid-July and mid-August, oil prices were heading upwards again.

In Switzerland, GDP had grown strongly in the first half of the year and employment was still improving. Consequently, capacity utilisation would remain high. The SNB, therefore, retained its GDP growth estimate for 2007 close to 2.5%, subject to any unexpected moderating effect arising from the uncertainties related to the financial markets.

As against the previous assessment, however, the inflation outlook had worsened somewhat. Oil price developments constituted the main risk. In addition, capacity utilisation remained high and the Swiss franc was still relatively weak. Nevertheless, it was possible that certain factors, such as a possible economic slowdown attributable to the turmoil on the financial markets, might limit the inflationary risks. In the meantime, since the turmoil on the money market had lifted the Libor from 2.5% to 2.9%, the tightening in monetary conditions was considered excessive with respect to the outlook for inflation. In this situation, the Governing Board decided in favour of relaxing money market conditions by bringing the Libor back to 2.75% while simultaneously lifting the target range by 25 basis points to 2.25–3.25%. From this assessment onwards, the SNB aimed for a Libor of around 2.75%.

Despite the higher level of the Libor, the inflation forecast published in September was almost identical to that of June. On the assumption of an unchanged Libor of 2.75%, the SNB forecast average annual inflation of 0.6% for 2007, 1.5% for 2008 and 1.8% for 2009. Inflation rose to the first quarter of 2008 and then flattened slightly from the second quarter onwards. In essence, this forecast was based on recent oil price developments. From mid-2008, a slight increase in inflation was expected, with figures even reaching 2% at the end of the forecast period.