Monetary policy report 1998

Announcement of an unchanged monetary policy

At the end of 1997 the National Bank had announced that it would continue implementing a generous monetary policy. It expected short-term interest rates to fluctuate on a low level of less than 2%. The supply of money was to be adjusted to the increase in demand, with the National Bank expecting real economic growth at the rate of 2% and an inflation rate of 1%.

Consideration given to economic activity and the exchange rate

Despite the worsening international economic situation business activity in 1998 largely fulfilled the expectations of the National Bank. The growth of real gross domestic product corresponded closely to the anticipated rate, and the inflation rate was only marginally overestimated. In the course of the year, however, sentiment notably in the export sector deteriorated, and medium-term growth forecasts were adjusted downwards both in Switzerland and abroad. When the Swiss franc came under upward pressure in the foreign exchange markets, first in February and then in September and October, the National Bank reacted flexibly and maintained an abundant supply of money.

Strong fluctuations in sight deposits

The sight deposits held by the commercial banks at the National Bank rose markedly from the previous year's level. In the course of the year, moreover, they underwent considerable fluctuations. This reflected the sometimes marked expansion in liquidity with which the National Bank counteracted an excessive appreciation of the Swiss franc. The merger between Swiss Bank Corporation and Union Bank of Switzerland into UBS LTD and the creation of a repo market in Switzerland likewise influenced the banks' liquidity behaviour. Furthermore, the turbulences in the financial markets had an effect on the demand for sight deposits by inducing individual banks temporarily to substantially increase their liquid funds at the National Bank.

Expansion of the monetary base

The expansion of sight deposits caused the seasonally adjusted monetary base to rise more markedly than expected. Between the fourth quarter of 1997 and the fourth quarter of 1998 it grew by 5.2%, thus exceeding the medium-term target path by 7.9%. Due to the shift in the demand for banknotes ascertained in the previous years and the switch by various banks of their liquid funds from postal cheque accounts to sight deposit accounts, the National Bank continues to assume that the gap between the monetary base and the medium-term target path overstates the degree of monetary expansion.

Weak growth of the money stock M3

The money stock M3, which the National Bank had increasingly used as an indicator in the past two years, showed only a slight rise in 1998. This reflected the persistently slow growth of bank loans. In the fourth quarter, M3 exceeded the previous year's level by 0.9%.