Swiss National Bank (SNB) Monetary policy decisions 2008

At the time of the final assessment of the year, the international situation had altered radically as compared to the September assessment. The financial crisis had now spread to the rest of the economy and the advanced economies had all moved into recession more or less simultaneously. In addition, with the drop in global demand, prices of oil, commodities and food had collapsed. This gave rise to further worsening in the growth outlook for the US and Europe.

The SNB expected that the Swiss economy would be severely affected by these developments. In the upcoming quarters, all the components of demand apart from consumption were likely to fall. The slump in foreign demand would probably hit Swiss exports, and especially exports of capital goods. Investment, moreover, was likely to be the component of demand that would drop most markedly. Consumption, however, would probably continue advancing, although at a slower pace, supported by retreating inflation rates, in particular. Consequently, the SNB forecast GDP growth for 2009 of between –0.5% and –1%.

The rate of growth of mortgage lending remained at a level comparable to that recorded at the previous assessment. Other lending was not affected by the financial crisis at the time of the assessment. At that stage, there was therefore no reason to speak of a credit crunch. In the wake of the drop in interest rates, growth in the monetary aggregates had accelerated, but there had been no increase in the risk of inflation since the strong demand for liquidity was fundamentally attributable to precautionary measures.

Despite the three inflation rate reductions decided upon in October and November, inflation risks had largely dissipated as a result of the deterioration in the economic outlook and the slump in oil prices. It was even possible that negative rates of inflation would be experienced for some months of 2009. In these circumstances, on 11 December 2008, the Governing Board decided to lower the Libor target range by an additional 50 basis points, with the new range being set at 0.0–1.0%.

The inflation forecast published at the time of the assessment was based on a three-month Libor of 0.5%. It showed an inflation rate of less than 2% from the fourth quarter of 2008. The forecast inflation continued to drop back until the end of 2010, apart from a brief climb in the fourth quarter of 2009 due to a base effect triggered by oil price movements. The forecast showed an inflation rate of 0.9% in 2009 and 0.5% in 2010. The slight increase in inflation expected at the end of the forecast period can be explained by the fact that a Libor of 0.5% does not represent an equilibrium level which guarantees price stability in the medium and long term.