Due to the appreciation of the Swiss franc, export-geared companies are exposed to strong price competition. In manufacturing, in particular, margins are under very strong pressure in some cases. However, survey results still suggest that robust foreign demand allows for good utilisation of capacities and supports exports. The short-term outlook also remains good for domestic demand. Construction investment is benefiting from favourable financing conditions, while higher capacity utilisation should stimulate equipment investment. Demand for labour is likely to firm further. For 2011, the SNB is maintaining its forecast of real GDP growth amounting to around 2%. Monetary and financial conditions Monetary conditions were again characterised by the divergence between low interest rates and the Swiss franc, which appreciated significantly in the second quarter. Since the last monetary policy assessment, the three-month Libor has persisted in the lower part of the target range. With inflation expectations rising slightly, real interest rates have remained low and even, in the short-term range, negative. In general, although long-term interest rates have risen since their low point in August 2010, they are still at a low level. By contrast, the real export-weighted Swiss franc appreciated further in the second quarter and has reached an all-time high. By the beginning of May, the US dollar – mainly – had weakened significantly against the Swiss franc. Thereafter, renewed concerns about stability in the euro area also led to a depreciation of the euro. My colleague, Jean-Pierre Danthine, will speak about the situation on the international financial markets in more detail later on.

The SNB is concerned about exchange rate developments. The SNB forecasts are based on the premise that the exchange rate developments will stabilise in the medium term. Should the exchange rate again be subject to significant changes, a reassessment of the inflation outlook would be required. Since the last monetary policy assessment, the M2 and M3 aggregates have been growing at about 7% year-on-year. Some of this high growth rate is attributable to the current low interest rates. Overall, ample liquidity is available in the economy and this means potential risks for price stability in the long term. Mortgage lending has also continued to increase substantially, growing at a rate of 4.7% in April. In an environment of low interest rates and substantial advances in real estate prices, a high rate of growth in mortgages can harbour risks for financial stability. In the speech that follows, my colleague Thomas Jordan will outline for you the SNB’s Financial Stability Report. In view of the potential risks for the financial sector, the SNB continues to closely observe the situation on the mortgage and real estate markets. 2  BIS central bankers’ speeches  Chart of conditional inflation forecast The (dashed) red curve on the chart represents the new conditional inflation forecast. It shows the future path of inflation, assuming that the three-month Libor remains constant at 0.25% over the next twelve quarters, and it covers the period from the first quarter of 2011 to the first quarter of 2014.