Monetary policy report 2003-2006


At its quarterly assessment of the situation in December 2002, the National Bank had expected economic growth in Switzerland to be around 1% in 2003 and that a sustained upswing would not set in before the second half of the year. On the assumption that the three-month Libor rate would remain steady at 0.75%, it forecast inflation rates between 0.7% (annual average 2003) and 1.6% (2005) in the next few years. It therefore seemed appropriate to leave the target range for the three-month Libor rate unchanged at the level of 0.25% to 1.25% applicable since 26 July 2002.

Lowering of the target range in March

In the first few months of 2003 it became clear that the economic upswing would be delayed. The impending war in Iraq strengthened this trend. In this situation, the National Bank strove to head off the tightening of monetary conditions that would arise from an appreciation of the Swiss franc. On 6 March the National Bank therefore lowered the target range for the three-month Libor rate by half a percentage point to 0%–0.75%. At the same time, the National Bank announced that for the time being, the three-month Libor was to be kept at the lower end of the target range at 0.25%. For technical reasons (zero lower bound for nominal interest rates), the target range has temporarily been reduced from 100 to 75 basis points. At the quarterly assessment of the situation of 20 March, this policy was confirmed, and at the same time a new inflation forecast was published (cf. also table Inflation forecasts).

Monetary conditions relaxed due to weakening of the Swiss franc

Following the lowering of the target range for the three-month Libor rate in March, the Swiss franc depreciated markedly. This led to a welcome further easing of monetary conditions. Nevertheless, the economic data were at first somewhat weaker than expected. The National Bank had already reduced its forecast for economic growth in 2003 to just under one percent in March; by mid-year it was expecting a stagnation and a little later a moderate decline of GDP. Inflation again decreased slightly.

No further adjustments to the target range until year-end

At the quarterly assessments of 11 June, 18 September and 11 December, the target range was left unchanged at 0.0%–0.75%. The inflation forecasts published on these three dates differed only in minor respects (cf. table).

Inflation forecasts Annual averages in percent

December 02
March 03
June 03
September 03
December 03

* Based on a constant three-month Libor rate

Inflation forecast signals interest rate rise in the medium term

Seen over the whole year, the National Bank endeavoured to underpin the economic recovery and to keep Swiss franc investments fairly unattractive. It considered its monetary policy to be expansionary. This is reflected in the inflation forecasts, which rose markedly near the end of the forecasting period and topped 2.0% in 2006, thus underscoring the fact that the low interest rate cannot be maintained in the long run.

Strong money supply growth

The expansionary monetary policy was accompanied by growing monetary aggregates. The strong money supply growth, however, overstated the risk to price stability. For one thing, credit creation by the banks continued to be slow-moving. For another, increasing liquidity was also a sign of insecurity on the part of investors, who had a preference for liquidity after the negative stock market experience and given the uncertain economic situation. The preference for liquidity is particularly marked whenever the interest rate level on the money market approaches 0%. In this case, interest income no longer covers the commission charged to investors on the conclusion of certain money market transactions. Thus in 2003, in particular fiduciary Swiss franc investments abroad flowed back into sight deposits in Switzerland. This inflow of capital additionally expanded the monetary aggregates.

Adhering to an expansionary monetary policy despite a strong increase in money supply growth

The National Bank held the view that monetary policy only needs to be tightened once the economic upswing is certain. Given the unused production capacities, a pickup in demand does not immediately put upward pressure on prices, leaving sufficient time to adjust monetary policy.