Swiss National Bank (SNB) Monetary policy decisions 2007

At the time of the June assessment, the US economy, although satisfactory, was a little less strong than expected. Consequently, the SNB reduced its growth forecasts for the US, setting them at 2.2% for 2007 and 3% for 2008. By contrast, the European economy was better than previously expected. The forecast for 2007 was lifted to 2.6% while that for 2008 remained unchanged at 2.2%.

The Swiss economy was in good shape at the time of the assessment, due in particular to demand from neighbouring countries and exchange rate developments. In addition, since the March assessment, the strength of the economy had continued to support improvements in the labour market. Consequently, unemployment numbers had declined further, with the rate slipping below 3%. As a result, the SNB forecast GDP growth close to 2.5% for 2007.

In the foreign exchange market, the Swiss franc had continued giving ground to the euro and appreciating against the US dollar. In export-weighted terms, it had depreciated by 1.7%. This relaxation in monetary conditions continued to work against the effects of Libor increases and threatened to stimulate inflationary pressures in an economy operating at a high level of capacity utilisation.

In this situation, price stability was exposed to several risks, the first of which was the high price of oil. The second risk was that global demand was growing at too rapid a pace in relation to the development in production capacity. The third risk was related to the decline in the value of the Swiss franc against the euro. To ensure that medium-term price stability was not jeopardised by the strong economy, the Governing Board decided to raise the Libor target range once again by 25 basis points, thereby taking it to 2.00–3.00%.

On the assumption of an unchanged Libor of 2.50%, the published forecast put average annual inflation at 0.8% for 2007, 1.5% for 2008 and 1.7% for 2009. The combined effect of high oil prices, strong economic developments and a weakening Swiss franc resulted in a deterioration in the inflation outlook during the course of the months following the assessment. However, from mid-2008, inflation moved up to a level slightly above that forecast three months previously, approaching 2% at the end of the forecast period.