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 and Chairman of the Board of Directors of the Bank for International Settlements, at the
end-of-year media news conference, Zurich, 14 December 2006.
* * *
As stated in our press release, the Swiss National Bank is raising its target range for the three-month
Libor with immediate effect by 0.25 percentage points to 1.50-2.50%. The SNB intends to hold the
rate in the middle of the target range for the time being.
Economic activity in Switzerland is very robust. Next year, the economic trend is likely to continue
favourable, albeit somewhat less pronounced. This will have a positive effect on the labour market.
The National Bank is expecting real GDP to grow by just under 3% in 2006 and by around 2% in 2007.
Declining oil prices have pushed back inflation. Average inflation for 2006 is likely to stand at 1.1%. By
lifting the target range, the National Bank ensures that the inflation outlook will remain favourable,
even in view of the high level of utilisation of economic resources. On the assumption of an
unchanged three-month Libor of 2.00%, it expects annual inflation to reach 0.4% in 2007 and 0.9% in
2008. If the economy performs as expected, the SNB will further pursue its strategy of gradual
normalisation of its interest rates.
The economy is currently in excellent shape and has clearly strengthened during the past two years.
At the monetary policy assessment at the end of 2004, we had suspended a normalisation of the
interest rates after previously having lifted the three-month Libor from a low point of 0.25% to 0.75% in
June and September. The three-month Libor remained at that level up to December 2005 when we
made the decision to resume the normalisation process, given the improved economic outlook.
Today's decision - an interest rate hike for the fifth time in succession - confirms the stance we have
taken.
International environment
The change in the international environment with the most tangible impact since the monetary policy
assessment in September concerns the price of oil. The current oil prices are clearly below the highest
level of 78 dollars per barrel of Brent crude which was reached in August. Will we see higher oil prices
again? There is no real conclusive answer to this question. What we have witnessed is nonetheless
the longest interruption of a rising trend since the beginning of 2004. This decline will weaken inflation
in most countries in the year ahead. However, the economic impact of the reduced oil prices is likely to
be low, if we bear in mind that the oil price is still approximately three times higher than it was five
years ago. At least the oil price has not put any additional damper on the economy since the last
monetary policy assessment.
Another significant factor for Switzerland is the marked improvement of the economic situation in
Europe, in particular in Germany. For 2006, growth forecasts in our neighbouring countries have been
gradually revised upward; for 2007, development is expected to be more muted. Economic activity in
the United States, however, has slowed at a somewhat faster pace than anticipated. In 2007, the US
economy is set to expand in the area of potential growth again. Asia will continue its dynamic growth
pattern.
Economic situation
What does the situation look like in Switzerland? As anticipated at the last monetary policy
assessment, the economic situation has continued to improve. It is both balanced and broadly based.
As the latest employment figures reveal, the momentum in the economy has spilled over into the
labour market. A great many new jobs were created in the third quarter, and unemployment continued
to decline. The number of gainfully employed persons rose by approximately 100,000 from Q3 2005 to
Q3 2006. The unemployment rate is likely to fall below the 3% mark at the beginning of 2007. The
brighter outlook on the labour market has improved job security and strengthened consumer
confidence. Expenditure by private households is soaring. Companies appear upbeat as well. Many
industries, such as manufacturing, construction and the hotel trade, report full employment. According
to our assessment, this translates into unchanged growth in real gross domestic product (GDP) of just
under 3% in 2006.
For 2007, we predict a decline in economic momentum. Almost all components of demand continue to
grow, albeit at a more moderate pace. Private consumption will benefit from the healthy improvement
in disposable income. Equipment investment is being stimulated by the high rate of utilisation of
production capacity and the favourable business outlook in many industries. Residential construction
is likely to see a measure of calm. Yet increased investment in commercial and industrial building may
offset this development to some extent. The somewhat weaker global economic development -
though still favourable overall - will probably continue to have a positive impact on exports. For 2007,
we expect overall GDP growth of about 2%.
Monetary developments
Allow me to explain developments in the financial markets and the monetary aggregates. Two topics
merit particular attention: the development of credit and money supply and the exchange rate.
In addition to long-term interest rates and exchange rates, loans - among other things - play an
important role when changes in key interest rates are transmitted to the economy. What information
can we derive from the development of lending activity? Loans are registering constant growth.
Mortgage loans, which account for the great majority of all bank loans, have grown at a rate of more
than 5% since 2003. This is a reflection of the clearly expansionary monetary policy at that time. The
growth rate of mortgage loans has gradually slowed, however, and is now slightly below 5%. This is
nevertheless still a high growth rate.
Other loans, however, are witnessing stronger growth and are currently expanding by 6%. Unsecured
loans, in particular, are rising substantially. During phases of favourable economic development, there
is greater willingness to grant unsecured loans. This was the case in 1999, when the economy found
itself in a similarly robust state. There is a long-term correlation between loan volume and the M3
aggregate. Loan development typically lags behind the development of money supply. Monetary
aggregates have grown only moderately for the past three years. The M3 monetary aggregate is
currently growing at a modest 2%, while M1 and M2 are even registering a decline. The measured
development of the monetary aggregates suggests a slowdown in lending.
The development of the Swiss franc attracted considerable attention as it has weakened vis-à-vis the
euro since the beginning of the year, although it has firmed against the US dollar. To gauge the effects
of exchange rates on the economy, we need to make use of the inflation-adjusted exchange rate that
is also weighted to take account of the importance of individual trading partners. Measured by this
real, effective exchange rate, the Swiss franc today is at the same level as it was in 2000.
In what way do exchange rate developments enter into our decision-making process? The exchange
rate is important to the extent that it influences inflation, either directly via the prices of imported goods
or indirectly via the business cycle.
Volatility of the Swiss franc against the euro has been negligible as of late. This relative calm should
not, however, deceive us. It is not necessarily going to last. Experience has shown that phases of a
weaker Swiss franc can be followed by periods in which the franc exhibits an upward trend. Financial
market players and businesses should therefore be aware of the exchange rate risks they take.
Monetary policy decision
The inflation outlook forms the basis for the monetary policy decision. How does this look to us? As
has already been pointed out in the considerations on the economic situation, there is likely to be an
above-average utilisation of economic resources. The monetary analysis shows that lending is still
growing vigorously and that the Swiss franc is trending relatively lower against the euro. Yet the
inflation outlook remains favourable. The reasons are three-fold: First, falling oil prices will push
inflation down considerably next year, at least during the first six months. Second, the opening of the
labour market is making production more flexible, thereby exerting a favourable influence on inflation.
Third, the National Bank lifted its interest rates at an early stage. The chief contribution of today's
interest rate adjustment is to prevent resources from being over-utilised in 2007 and 2008. As a
consequence, inflation is also likely to be muted in 2008 and 2009.
Inflation forecast graph
The new inflation forecast is shown in the graph as a red dashed line. It covers the time span from Q4
2006 to Q4 2009 and depicts the inflation forecast on the assumption that the interest rate remains at
2.00% during this period of time. The dash-dotted green curve shows the inflation outlook published
after the interest increase of September, which was based on a constant three-month Libor of 1.75%.
The red line is clearly lower than the green one. This is partly due to falling oil prices and partly results
from the dampening effect of today's interest rate increase. The level of inflation expected in 2007 is
0.4%. However, as is evident from the inflation dynamic, the effect of a 2.00% interest rate is still
expansionary.
Continuation of previous monetary policy
With today's decision to increase the three-month Libor by 25 basis points, we are adhering to our
previous monetary policy course of gradual normalisation. In so doing, we are pursuing the goal of
continuing to ensure long-term price stability. If the economy performs as expected, we will further
pursue this strategy.
Observed inflation December 2006
Inflation forecast of September 2006 with Libor at 1.75% and of December 2006 with Libor at
2.00%
The National Bank's 100-year anniversary
Ladies and Gentlemen, before concluding, I would like to say a few words on a completely different
topic: The Swiss National Bank will celebrate it's 100-year anniversary in 2007. We are happy that we
can celebrate this anniversary at a time when Switzerland's economy is in good shape. And it is also
with a certain sense of pride that we can look back upon a long phase of price stability.
We will celebrate our anniversary in a festive, yet modest way. The 100th anniversary General
Meeting of Shareholders on 27 April will, of course, be turned into a special event. On 13 June, at our
traditional joint dinner before the news conference in Berne, we will take the opportunity to toast our
centenary together with you. The highlight of the celebrations will be the launch of our commemorative
publication on 21 June followed by the official ceremony in Zurich on 22 June. I look forward to
welcoming many of you to these festivities. We will conclude our anniversary year with a two-day
event for our staff in Berne on 25/26 August.
Apart from these anniversary events, we will realise two special projects in 2007: the publication of
historical time series and the launch of an internet platform on macroeconomic issues.
The new statistical publication series comprises several booklets which will be published on a
quarterly basis in the first year and then at irregular intervals. The topics presented cover the fields
that were, or still are, significant for the formulation and implementation of monetary policy. The data
series go back 100 years, where possible. The printed publications will contain annual figures, while
additional data series and series with shorter intervals (quarterly, monthly, etc.) will be available on the
internet. The publications also include commentaries on the data series, describing the calculation
method and, for some topics, the historical and regulatory background. The first issue - dedicated to
the monetary base and monetary aggregates - will be published in the first quarter of 2007.
In autumn 2007, the SNB will launch Iconomix, an internet platform intended for public use. It will take
visitors on a journey of discovery into the world of economics. The site "iconomix.ch" will contain
teaching modules, highlighting various aspects of our daily life from an economic point of view. The
modules are mainly designed to be used by senior secondary school students. In principle, however,
the contents can be freely accessed by the public at large. By setting up this platform, the National
Bank wishes to contribute to a better understanding of economic issues by a wider public.