Swiss National Bank (SNB) Monetary policy decisions 2007

As at each monetary policy assessment, the SNB bases its inflation forecast on the global economic scenario it regards as most likely. The economic trends that had emerged in the course of 2006 – a slowdown in the US and sustained growth in Europe – were confirmed at the first quarterly assessment of 2007. Consequently, the SNB predicted growth for 2007 of 2.8% in the US and 2.3% in Europe, and for 2008 of 3.1% in the US and 2.2% in Europe. It also expected that the decline in oil prices would continue to dampen inflation in the months following the assessment.

At the time of the assessment, the business cycle in Switzerland was solidly established. During the course of the following quarters, most components of domestic demand as well as exports would further consolidate growth. Moreover, the healthy economy would stimulate the labour market and promote a further decline in unemployment. Consequently, the National Bank continued to forecast GDP growth of approximately 2% for 2007.

At the time of the quarterly assessment, the Swiss franc had strengthened a little against the euro, following a period of weakness whose effect on inflation had not been significant.

In this context, the evaluation of the inflation outlook at the time of the assessment involved a greater level of uncertainty. Although foreign competition and the opening up of the labour market continued moderating price increases, there was a risk that, to an increasing extent, the rise in production costs would be passed on to prices due to the high level of capacity utilisation. Consequently, the Governing Board decided to lift the Libor target range by 25 basis points, with the new range being set at 1.75–2.75%.

According to the graph shown at the end of the assessment, the path of the inflation forecast based on an unchanged Libor of 2.25% was below that of December 2006 for a large part of 2007, due in particular to the drop in oil prices. The acceleration that followed, in which the new forecast overtook that of December, was more marked than previously, due to the weakening in the Swiss franc, which neutralised the impact of the increase in the interest rate. For 2009, the path of the forecast again fell below the December forecast, as the effects of the higher interest rate once again predominated. Expected inflation amounted to 0.5% for 2007, 1.4% for 2008 and 1.6% for 2009. Even though inflationary forces were muted overall, they picked up slightly at the end of the forecast period.