Monetary policy assessment
Central bank: snb | Type: statement | Date: 2006-03-16

Communications
P.O. Box, CH-8022 Zurich
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Zurich, 16 March 2006
Press release
Monetary policy assessment of 16 March 2006
National Bank raises the target range for the three-month Libor by 0.25 percentage points to 0.75–1.75%
points to 0.75–1.75%. It intends to hold the rate in the middle of the target range for the time being.
Economic development is in line with expectations. It has gained further momentum and is becoming increasingly broad-
based. The National Bank still expects GDP to expand by a little more than 2% in 2006. At the moment, inflation is largely
determined by the price of oil. It should remain moderate and subside somewhat in the course of 2006. The SNB forecasts
average annual inflation of 1%.
By raising the target range, the National Bank is adjusting its monetary policy stance to economic activity. Despite the interest
rate lift, monetary policy remains expansionary and supports the upswing. The SNB’s action ensures, however, that the
inflation outlook remains favourable. On the assumption that the three-month Libor will remain unchanged at 1.25%, annual
inflation is projected to reach 1.1% in 2007 and 2.0% in 2008. Provided that the economy continues to perform as expected,
the National Bank will further pursue the gradual adjustment of its monetary policy. If the Swiss franc were to appreciate
rapidly, the SNB would respond appropriately.
International environment
The National Bank’s inflation forecasts are embedded in a scenario for the global economy, which – according to the SNB’s
assessment – represents the most likely development. Given that global economic assumptions have altered only slightly
overall since the December forecast, expectations for a robust global economy remain intact.
The lower-than-anticipated GDP growth in the US for the fourth quarter of 2005 is mainly due to temporary factors. GDP
expansion for 2006 is projected to accelerate again to over 3%. There are signs that economic activity in the euro area is
above the December predictions. The National Bank projects economic growth of approximately 2.5% for 2006.
The assumed euro/dollar exchange rate was almost the same as in the December 2005 forecast. The price of oil has been
fluctuating at a high level since the middle of last year. The oil price expectations were adjusted slightly upwards compared
with the previous assessment in December.
Price of oil and competitive pressure
On the assumption that the price of oil will remain stable, annual inflation will subside in the course of 2006. New global
suppliers and stronger competitive pressure in the retail trade continue to hold back price rises. However, such changes in
relative prices can only influence the price trend temporarily.
Economic outlook
Economic activity was in line with the SNB’s expectations. The National Bank anticipates economic growth of a little over
2.0% for Switzerland this year, which corresponds to the December forecast. The economy has gained further momentum
and is becoming increasingly broad-based. The labour market is showing signs of improvement. Owing to the favourable
sales trend in all the major markets, exports should rise again in 2006, albeit at a slower rate than previously. This will
continue to have a positive effect on the domestic economy. Higher utilisation of technical production capacity is likely to
strengthen investment activity and boost demand for equipment goods. The conditions for a stimulation of employment and
private consumption are thus fulfilled. Given its currently high level, only construction investment is likely to decline somewhat
this year.
In view of the robust economic situation, the National Bank expects production capacity to reach a normal level of utilisation in
the course of the year. The utilisation rate will continue to vary between companies. However, we are approaching the time
when higher aggregate demand will have an effect on prices rather than on economic activity, as more companies are
increasingly making full use of their production capacity.
Monetary development
The monetary aggregates react rapidly and sensitively to the SNB’s interest rate decisions. Alone the expectations of a
change in the three-month Libor influence the interest rates on longer-term investments, thus resulting in a new assessment
of the opportunity costs of holding money. Accordingly, the monetary aggregates grew at a slower pace following the two
interest rate decisions of June and September 2004. This pattern was confirmed after the interest rate hike of December
2005. The money overhang, which had been built up due to the strongly expansionary monetary policy in the past, did not
grow any more as a result of the last three interest rate decisions.
Growth in lending has stabilised at a relatively high level. Mortgage loans continue to increase by over 5% year-on-year. As
the other loans remained steady, aggregate lending grew more slowly than mortgage loans. The SNB will continue to keep a
close eye on developments in the real estate market.
Inflation outlook and reasons behind the monetary policy decision
The Libor target range was lifted by 0.25 percentage points at the last assessment. The inflation forecast, which was based on
a Libor of 1.0%, pointed to an increase in inflation in the longer term. Given this situation, the SNB announced that it would
further adjust its monetary policy should the economy continue to recover. Economic activity was as anticipated, and the
inflation outlook was also confirmed at the new assessment. The further 25-bp increase in the target range is intended to
counteract an overutilisation of production capacity and an excessive liquidity supply.
Inflation forecast following the monetary policy decision
The National Bank uses the inflation forecast to summarise its assessment of the inflation outlook and to communicate the
future need for action in monetary policy. The new inflation forecast (dashed red line) extends from the first quarter of 2006 to
the fourth quarter of 2008 and is based on the assumption of a constant three-month Libor of 1.25%, as against a Libor of
1.0% used for the December forecast (dash-dotted green line).
Despite the higher interest rate, the new forecast exceeds that of December 2005 until the end of the year. The reasons for
this development are two-fold. First, the upward revision of the oil price assumption results in a temporary rise in inflationary
pressure. Second, there are signs of a moderate increase in prices of imported goods. As of the beginning of 2007, the new
forecast lies below the previous one. This reflects the dampening effect of today’s interest rate decision on future inflation.
Inflation is projected to remain low, averaging 1.0% in 2006 and 1.1% in 2007. It is evident from the inflation dynamics,
however, that a three-month Libor of 1.25% is still not sufficient to guarantee price stability in the longer term.
Continuation of previous monetary policy
With today’s decision to increase the three-month Libor by 0.25 percentage points, the National Bank is adhering to its
previous monetary policy course. It continues to make use of the leeway available to it to bolster the economy without
endangering price stability in the longer term. Provided that the economy continues to perform as expected, the National Bank
will further pursue the gradual adjustment of its monetary policy. Should the Swiss franc appreciate rapidly, the SNB will
respond appropriately.
Observed inflation March 2006
Inflation forecast of December 2005 with Libor at 1.00% and of March 2006 with Libor at 1.25%
Inflation forecast of March 2006