Monetary policy assessment
Central bank: snb | Type: statement | Date: 2004-09-16

Communications
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Zurich, 16 September 2004
Press release
Monetary policy assessment
points to 0.25%-1.25%. For the time being, it intends to keep the three-month Libor rate in the middle of the target range at
Economic activity in Switzerland is developing in line with the National Bank's expectations. The National Bank still anticipates
economic growth to be close to 2% in 2004. Utilisation of the economy's output capacities is expected to improve steadily.
Notwithstanding the price increase for oil, the National Bank expects an average annual inflation rate of a mere 0.7% this
year. On the assumption that the three-month Libor rate will remain unchanged at 0.75%, the National Bank anticipates an
annual inflation rate of 1% in the coming year and 1.7% in 2006. The monetary policy of the National Bank will remain
expansionary and support the upswing. The second interest rate rise by 25 basis points now announced will reverse the
interest rate cut of March 2003, which was made under extraordinary circumstances. Should the Swiss franc appreciate
markedly as a result of unexpected developments, the National Bank will react appropriately.
Inflation forecast
The National Bank's inflation forecasts are embedded in a worldwide economic scenario. This scenario is considered to be the
most likely development at the time. The National Bank assumes that the world economic upswing will continue.
The new inflation forecast (dashed red line) for a three-month Libor of 0.75% extends from the third quarter of 2004 until the
second quarter of 2007. The dash-dotted green line shows the inflation forecast of June based on a three-month Libor of
0.5%. Until the second quarter of 2005, the current forecast exceeds the June forecast. Following 0.8% in the third quarter of
2004, it will reach a peak of 1.2% in the first quarter of 2005, only to fall back to 0.8% in the third quarter of 2005. From the
third quarter of 2005 onward, the forecast lies below the last forecast. At the end of the forecasting horizon, the current
forecast will reach 2.9%.
Development of oil prices
The SNB still assumes that the recent oil price increases will be temporary. Compared with the June forecast, the oil price to
be assumed in the short term was raised. The new inflation forecast has therefore moved upward in the short term. The
assumed decline in oil prices as from the first quarter of 2005 will have a dampening effect on consumer prices.
Economic outlook
As up to now, the National Bank expects a real GDP growth of close to 2% in 2004. For the two following years, a further
increase in exports, a rise in equipment investment, robust private consumption and sustained economic growth are
anticipated. Accordingly, economic production capacities will be steadily better utilised, while unemployment will gradually
decline. With the improved utilisation rate of the economy, inflationary pressure will increase in the medium term.
Monetary development
The high growth rates of the monetary aggregates have led to a money overhang since the beginning of 2003. The expansion
of the monetary aggregates has declined recently. For the first time since the first quarter of 2003, the M3 money overhang
again receded in the second quarter. Accordingly, the long-term inflation risk declined slightly due to the moderate tightening
of monetary policy in June.
Continuation of expansionary monetary policy
The three-month Libor was lowered, in March 2003, from 0.75% to 0.25% against the backdrop of an international
environment with deflationary trends. When the three-month rate was increased to 0.5% on 17 June 2004, interest rates were
again raised for the first time after having remained at an historically low level for more than a year. The renewed interest rate
rise by 25 basis points now announced will reverse the interest rate reduction of March 2003, which had been made under
extraordinary circumstances. The interest rate increase is evidence of the National Bank's confidence in a continued upswing.
The monetary conditions will remain expansionary.
Inflation forecast of September 2004