Jean-Pierre Roth: Recent economic and financial developments in
Switzerland
Introductory remarks by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss
National Bank, at the half yearly media news conference, Berne, 18 June 2009.
* * *
Since the beginning of the financial crisis in August 2007, our monetary policy has passed
through three distinct stages.
In the first stage, as the interbank market gradually dried up, we sought to protect the Swiss
economy from a deterioration in conditions on the credit market. From the start of the crisis,
we countered the forces pushing the level of the three-month Libor up by undertaking
appropriate reductions in the repo rate. Between September 2007 and September 2008, we
were able to stabilise the Libor at 2.75%. Thus we protected our economy from a rise in
interest rates resulting from the increase in risk premia on the money market. Since we were
confident that the economic downturn would have a moderating effect on prices, we refrained
from adopting a more restrictive monetary policy, despite the fact that soaring oil prices
caused inflation to rise and risked destabilising inflation expectations.
The second stage began in autumn 2008 with the emergence of the first indications of a swift
downturn in the economy and the sharp deterioration in the financial crisis after the collapse
of Lehman Brothers investment bank. We rapidly relaxed our monetary policy by bringing
down our Libor target by 225 basis points to a level of about 0.5% within three months. At the
same time, we had been charged with stabilising the financial sector, committing ourselves to
take over a large portfolio of illiquid UBS assets. In addition, we concluded euro versus Swiss
franc swap arrangements with the European Central Bank and the central banks of Poland
and Hungary, to ease refinancing of banks that had granted mortgage loans in Swiss francs
in these two countries. These swaps made it possible to counteract the rise in the Libor
generated by an additional demand for Swiss francs outside our normal field of operation.
The third stage began in March 2009. By then, price stability was threatened, not by the
temporary inflationary escalation of 2008, but quite the opposite - the risk of a fall in prices
over the coming three years. Since, by that time, our room for manoeuvre in the area of
interest rates was limited, we decided to turn to unconventional instruments in order to bring
about a further relaxation in monetary conditions.
How has the economic and financial situation developed since our assessment in March?
Global economic outlook
Global economic activity declined more sharply than expected in the first quarter of 2009,
especially in Europe and Japan. However, recent financial and macroeconomic indicators
have shown a few encouraging signs. Stock exchange indices have started to edge up. Oil
prices, which had been falling since July 2008, have been rising again since March. Risk
premia in the money and capital markets have declined. In addition, the indices of business
activity and household confidence has clearly turned upward again, even if they remain at
historically low levels. The combined effect of all these developments leads us to modify our
risk assessment but does not substantially affect our scenario for the global economy. We
still believe that positive growth could set in within the US in the second half of the year and
in Europe at the beginning of next year. We continue to expect a modest global recovery, so
that the considerable under-utilisation of production capacities will not be eliminated in the
next few quarters. Consequently, unemployment is likely to increase further in the developed
countries as a whole.
Swiss economic outlook
As expected, the Swiss economic situation continued to deteriorate in the first months of the
year. In the first quarter, GDP contracted by 3.2% in annualised terms. However, this figure
obscures a much sharper drop in final demand. As in the preceding quarter, part of
production was, in effect, absorbed by an increase in stocks. External demand again
plummeted and the level of capacity utilisation fell substantially in the manufacturing sector.
Final domestic demand by private entities stagnated, and is most likely to weaken in the
months ahead, since companies will reduce their equipment investment and household
expenditure will be checked by growing uncertainty in the labour market. The number of
individuals affected by short-time working was rising fast at the beginning of the year, and
unemployment is increasing at a regular pace. This trend is likely to persist in the next few
months since the leading indicators of labour demand are falling sharply.
Nevertheless, it is to be hoped that the signs of improvement observed abroad will be
gradually transmitted to the Swiss economy. From the second quarter, the decline in exports
is likely to slow down. However, growth figures will probably remain negative over the next
few quarters due to the weakening in domestic demand as well as the reduction of inventory
levels. For 2009 as a whole, the Swiss National Bank (SNB) continues to forecast a
reduction in GDP of between 2.5% and 3%. These figures are still relatively moderate by
comparison with other countries since Switzerland benefits from the broad diversification and
relative flexibility of its economy. Even so, I wish to stress that the risks attached to our
forecast are clearly skewed to the downside.
Changes in monetary and financial conditions
How have monetary and financial conditions developed since our last assessment in March?
Let us begin by looking at movements in interest rates on the money and capital markets as
well as currency movements on the foreign exchange markets.
On the money market, three-month Libor moved down, but not as far as we would have
liked. Its decline was checked by the level of risk premia, and it currently stands at around 40
basis points. As announced in March, the objective is still "to gradually bring the Libor down
to the lower end of the new target range, i.e. to approximately 0.25%." Progress will be slow,
since monetary policy can only influence risk premia indirectly, for instance, by promoting a
climate of greater confidence in the banking sector.
The capital market was affected by forces working in opposite directions. On the one hand,
long-term rates of interest, which were affected by global developments, rose slightly. This
increase reflects renewed optimism about an upturn in the economy, inflationary fears and
increased capital requirements on the part of the public sector. On the other hand, risk
premia have fallen somewhat. Nonetheless, they remain elevated, and - moreover - the
reductions that have occurred have been varied, depending on the quality of borrowers, the
maturity of the bond in question and the industry.
The months from November 2007 to March 2009 saw a significant appreciation in the Swiss
franc, by 10% in trade-weighted terms and by 11% against the euro. Although interest rates
had been reduced between October and December last year, the strengthening of the Swiss
franc had the unwelcome effect of tightening monetary conditions. In view of this
development, we decided at our March assessment to prevent further appreciation of the
Swiss franc against the euro by purchasing foreign currencies on the foreign exchange
market. We achieved our objective. Since then the appreciation of the Swiss franc against
the euro has ceased and its volatility with respect to the European currency has diminished
considerably.
Let us now proceed to an examination of monetary conditions in terms of volume - in other
words, in terms of credit and monetary aggregates. Overall, credit is still growing at an
annual rate of more than 3%. However, this general figure is composed of a number of
different movements in opposite directions. Mortgage lending has been increasing more and
more rapidly since November. The growth rate rose from 3.6% in December to 4.2% in April,
an advance related to the fall in the Libor. Other credits for all currencies, by contrast, began
falling in April (-0.8%), as might be expected in this phase of the economic cycle. Other
credits granted in Swiss francs, however, continued growing at a rate of 1.2%, despite the
fact that they were already at a relatively high level. Loans granted to private companies
grew at a rate of 10.2% in the first quarter of 2009 as compared to the first quarter of 2008.
Thus, we do not perceive the slightest indication of any credit crunch in Switzerland. Clearly,
with the decline in the quality of certain borrowers during a recession, it is inevitable that a
cyclical tightening of loan conditions will occur, but this cannot be termed a credit crunch.
This statistical information is confirmed by the quarterly survey on lending conditions which
the SNB has been conducting with the 20 most important Swiss banks since the beginning of
2008. The survey shows that a third of the banks questioned tightened their lending
conditions slightly. This proportion is a little higher for loans granted to large companies than
those granted to small and medium-sized companies.
To summarise, the situation on the bank lending market remains relatively relaxed and
clearly better than that in the US or in the euro area. Nonetheless, deterioration cannot be
ruled out for the future.
We now move on to monetary developments. For more than eighteen months now, the
demand for liquidity on the interbank market has increased substantially and - as I
mentioned before - the loss of trust among banks has brought the market to a standstill. The
SNB has been forced to take the place of the lending banks and provide the market with
generous amounts of liquidity through a major expansion of its repo lending. Moreover,
additional liquidity has been created by purchasing foreign currency on exchange rate
markets and bonds issued by private sector borrowers, and by making Swiss franc funding
available through swap arrangements with the European Central Bank and with the central
banks of Poland and Hungary. Consequently, in May, the monetary base was up by 132%
within the space of one year and now amounts to CHF 105 billion. The medium and
longterm inflationary threat of this large amount of liquidity is limited because we will be able to
absorb it rapidly, by slowing our lending or by issuing SNB Bills, as soon as confidence
returns to the markets.
However, liquidity accumulated by the banks could give rise to excessive creation of money
through a massive expansion of bank credit. In May, growth in the narrow monetary
aggregates, which are very sensitive to changes in the rate of interest, exceeded 40% for M1
and 30% for M2. In essence, this strong rate of growth reflects a preference on the part of
the general public for the most liquid monetary assets over time deposits, due to financial
uncertainty and the fall in interest rates. The M3 aggregate, which is not affected by these
substitution effects, continued growing at a more moderate rate of 4.2% in May, which shows
that, at present, created central bank money is confined at the interbank level and has not
been transmitted to the rest of the economy. Monetary policy needs to ensure that the level
of the monetary aggregates does not become excessive over a longer period. The indicators
we are monitoring show that this is not currently the case.
Inflation and inflation risks
Inflation developed in line with our expectations. In the first quarter it was zero, while we
were anticipating 0.1%. Overall, our forecasts are unchanged for the current year, with
inflation remaining negative for the rest of 2009. This, in essence, is attributable to the prices
of imported goods, which are down by comparison to their high levels in 2008. However,
inflation for domestic goods and services, despite weakening during the year, will remain
above 1%.
The outlook for the following years has been very slightly adjusted upwards. We shall return
to this point in a few moments.
Monetary policy decision
At our monetary policy assessment in March, we identified a number of elements that led us
to foresee negative inflation for 2009 and a risk of deflation for 2010 and 2011. In view of this
threat, we relaxed monetary conditions by taking supplementary measures. We reduced the
three-month Libor target range by 25 basis points to 0-0.75%, aiming for a rate of 0.25%. In
order to achieve this, we granted longer-term repo credits and concluded foreign exchange
swaps. To prevent the Swiss franc from further appreciating against the euro, we purchased
foreign currency on the foreign exchange market; we also purchased bonds issued by private
sector issuers to foster a decline in capital market risk premia. All in all, these operations
achieved their objective. The situation is gradually normalising, although it remains very
vulnerable. The risks are still clearly skewed to the downside and are major. Given these
conditions, and in view of the inflation forecast, we consider that the time for a correction has
not yet come, but that an additional relaxation of monetary conditions is not necessary either.
We have thererfore today decided to continue our expansionary monetary policy, maintaining
all of the measures we implemented on 12 March.
Inflation forecast chart
How has our inflation forecast been revised? The dashed red curve on the chart represents
the new forecast. It covers the period from the second quarter of 2009 to the first quarter of
2012, and maps the future development of inflation on the assumption that the three-month
Libor remains unchanged at 0.25% over the forecasting period. For purposes of comparison,
the dash-dotted green curve shows the inflation forecast of the March monetary assessment,
which was also based on a three-month Libor of 0.25%.
The new forecast still shows negative inflation for 2009, but with a very slight adjustment
upwards. This is explained by the recent upturn in prices of fossil fuels and of commodities in
general. However, as an average for the year, inflation will remain negative, at an unchanged
rate of -0.5%. In 2010, inflation is likely to return to slightly positive rates and could be a little
above the figure forecast in March. This is due to the fact that although domestic inflation is
falling it will still amount to around 1% at the end of the year while imported deflation recedes
more rapidly. Finally, for 2011, the new forecast shows that inflation will accelerate a little at
the end of the forecast horizon if the Libor remains at a level as low as that being aimed for
at present. Thus, we see that the Libor cannot remain at 0.25% indefinitely. However, as our
forecast also shows, it would not be advisable to increase the Libor now since the very weak
inflation rates expected in 2010 (0.4%) and 2011 (0.3%) indicate that the deflation risk has
not completely disappeared.
We continue to use an inflation forecast to guide our decisions. In this way, we will ensure
that the unconventional measures currently in force do not compromise medium and
longterm price stability.
Observed inflation June 2009
2006 2007 2008 2009 2006 2007 2008
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Inflation 1.23 1.33 1.22 0.46 0.09 0.52 0.63 1.68 2.50 2.70 3.00 1.60 0.00 1.1 0.7 2.5
Inflation forecast of March 2009 with Libor at 0.25% and of June 2009 with Libor at 0.25%
2009 2010 2011 2012 2009 2010 2011
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Forecast March 2009,
0.10 -0.86 -0.98 -0.43 0.09 0.19 0.13 0.01 -0.05 -0.04 0.10 0.25 -0.5 0.1 0.1
Libor at 0.25%
Forecast June 2009,
-0.74 -0.83 -0.28 0.55 0.50 0.40 0.26 0.16 0.17 0.31 0.46 0.65 -0.5 0.4 0.3
Libor at 0.25%
BIS Review 77/2009