In the months preceding the first assessment of 2009, economic activity declined sharply in the US and Europe. The crisis, which had started in the financial markets, had spilled over to the non-financial economy, and its effects were being felt throughout the global economy. Against this background, the SNB made a substantial downward revision to its growth forecasts for the major economies, in particular for the US (2009: –1.8%; 2010: 1.9%) and Europe (2009: –1.1%; 2010: 0.5%).
In Switzerland, annualised GDP had fallen by 1.2% in the fourth quarter of 2008. By the time of the assessment in March, the economy was being severely affected by the crisis, with Swiss exports particularly hard hit by the collapse in global demand. Moreover, unemployment was rising steadily, bringing the risk of a levelling-off in private consumption. Consequently, the National Bank revised its forecast downwards and projected that GDP for 2009 would be between –2.5% and –3%.
At the time of the assessment, the growth rates for the M1 and M2 monetary aggregates were relatively high, while M3 growth remained moderate. The volume of base money had doubled within the space of a year, reflecting a huge increase in the demand for liquidity from the banking sector. The rate of growth in lending volumes had been slowing since the beginning of the year. Yet mortgage loans remained unaffected – growth in this segment had gathered pace since autumn 2008, reaching 3.8% in January 2009. Overall, therefore, the situation on the Swiss lending market was better than that in the rest of the world.
The Swiss franc had gained markedly in value since the onset of the international financial crisis in August 2007. This trend had accelerated after the December 2008 assessment, and, by the time of the March 2009 assessment, had given rise to an unwelcome tightening of monetary conditions. Inflation, having peaked at 3.1% in July 2008, had fallen back to 0.2% by February. This was largely attributable to the slump in oil prices and the appreciation of the Swiss franc. The SNB expected that inflation would turn negative over the course of 2009.
In response, the National Bank decided to bring interest rates down further, and narrowed the target range for the three-month Libor to 0.0– 0.75%. Its aim was to bring the Libor down into the lower end of the target range, at around 0.25%. It also decided to substantially increase the supply of liquidity by entering into long-term repos, purchasing Swiss franc bonds issued by domestic private sector borrowers and buying foreign currency on the foreign exchange market, in order to prevent the Swiss franc from appreciating further against the euro, as well as to improve financing conditions.
In addition, from autumn 2008, the SNB negotiated EUR/CHF swap agreements with a number of countries to facilitate refinancing for banks that had granted loans in Swiss francs in those countries. This allowed the SNB to counter the rise in the Libor generated by additional demand for Swiss francs from abroad.
The inflation forecast published together with the interest rate decision was based on a three-month Libor of 0.25%, and showed negative inflation for 2009, partly as a result of a base effect from falling oil prices. For 2010 and 2011, inflation was expected to remain low due to the weak state of the economy, despite the low interest rate environment. At the end of the forecast horizon, inflation increased slightly, reflecting the fact that a Libor of 0.25% would not guarantee price stability in the medium and long term.