Swiss National Bank (SNB) Monetary policy decisions 2007

For the final assessment of the year, the SNB assumed that US economic growth – affected simultaneously by the unfavourable developments on the real estate and credit markets and by the rise in oil prices – could weaken in 2008 (forecast: 2.4%). At the time of the assessment, Europe did not appear much affected by the rise in the euro and the turmoil on the financial markets, and its growth outlook was likely to remain good, even though the SNB adjusted it slightly downwards for 2008 (forecast: 2%).

Swiss growth was strong in the third quarter, with GDP growing at an annualised rate of 3.3%. Simultaneously, in the months preceding the assessment, employment had continued increasing in practically all sectors. As a result of these developments, the growth outlook remained good for the quarters ahead, and therefore the SNB was forecasting GDP growth of some 2% in 2008, a lower figure than that recorded in 2007. This relaxation in the pace of economic activity should allow for some reduction in the level of capacity utilisation.

The inflation outlook remained good, even though it encompassed even more uncertainties than the previous assessment. Although price stability would be supported by the expected slowdown in the growth of the Swiss economy and the reduction in the rate of increase of the monetary aggregates, there were other elements capable of disturbing this stability. Examples of such inflationary factors were the rise in oil prices, should it persist, as well as the continued weakening in the Swiss franc. In this uncertain situation, the Governing Board decided to retain the Libor target range at 2.25–3.25%, aiming for a Libor of 2.75%.

On the assumption of an unchanged Libor of 2.75%, the inflation forecast indicated a surge in inflation in the first half of 2008. This advance, in which expected inflation temporarily rose above 2%, was mainly due to the increase in the price of oil. From mid-2008 to the end of the forecast period, however, inflation settled at around 1.5%. The sudden correction to the forecast in the middle of the year was due to a baseline effect, and the downturn of the path at the end of the forecasting period was to be seen within the context of the expected slowdown in the international economy.