Monetary policy report 1999

Announcement of an unchanged monetary policy

At the end of 1998, the National Bank had announced that it would continue implementing a basically generous monetary policy in 1999. In the wake of the problems in East Asia and the anticipated slowdown in growth in the United States it expected economic activity in Western Europe to weaken. For Switzerland, it forecast real economic growth of 1.5% and a rise in inflation to 1%. Furthermore, it indicated that with its planned monetary policy it also intended to take account of the uncertainties associated with the introduction of the euro.

Economic revival - smooth launch of the euro

Economic growth and inflation in 1999 came close to the expectations of the National Bank. Though business activity was still weak at the start of the year, this was soon followed by a marked recovery. The euro was launched without a hitch. In the first few months of the year, the National Bank strove to keep the Swiss franc exchange rate against the euro as stable as possible. In the second half of the year, however, the exchange rate still kept within a very narrow band. This was due not least to the fact that the economic situation was then similar in Switzerland and the countries of the euro area.

On average, slightly lower call money rates

The implementation of monetary policy was reflected by the course of call money rates. Their annual average was somewhat below the previous year's level. As from 9 April, the National Bank lowered the discount rate by 0.5 percentage point to 0.5%. This step went hand in hand with the lowering of interest rates by the ECB. Swiss money market rates fell in the wake of this interest rate reduction, only to rise again in the second half of September. Long-term money market rates were to some extent characterised by expectations of a liquidity bottleneck at the end of the year. The National Bank did not react to this increase in interest rates since the pickup in economic activity also tended to add to the danger of inflation. Nevertheless, it left the discount rate unchanged at 0.5%.

Declining sight deposits

The sight deposits held by the commercial banks at the National Bank declined substantially from the previous year's level. This fall is due, on the one hand, to the marked temporary expansion of sight deposits in October 1998, when the National Bank had provided the money market with additional liquidity in order to counteract an undesirable appreciation of the Swiss franc. On the other hand, it reflects the generally declining trend in the banks' demand for sight deposits. This was partly a consequence of the merger between Swiss Bank Corporation and Union Bank of Switzerland to form the UBS. Other factors that had the effect of reducing the demand for sight deposits are the introduction of intraday liquidity by the National Bank and the steady expansion of repo business which, in contrast to traditional interbank credits, does not require risk backing in the form of liquid funds.

No end-of-year problems

The year-end settlement proceeded smoothly despite the critical change of date. The National Bank had made it known at an early stage that it would fulfil any liquidity requirements in excess of the level that was usual at this time of year. It concluded several forward-forward repos and gave the banks an opportunity to temporarily raise their Lombard limits. It also increased its stocks of banknotes in order to be able to meet even a massive rise in the demand for banknotes.

Stagnating monetary base

The seasonally-adjusted monetary base barely changed at all in the course of 1999, only to rise markedly at the end of the year. In the fourth quarter, it surpassed the corresponding year-earlier level by an average of 1.5%, exceeding the medium-term target range laid down at the end of 1994 by 8.4%. Based on the shifts in the demand for banknotes observed over a number of years and the banks' changed liquidity behaviour, the National Bank assumes that the gap between the monetary base and the medium-term target path again overstated the degree of monetary expansion in 1999.

Weak growth of the money stock M3

The money stock M3, considered by the National Bank to be the most important monetary aggregate in the past few years, showed only a slight rise in 1999. In the fourth quarter, M3 exceeded the corresponding previous year's level by 0.7%.

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