jean - pierre roth : the swiss national bank ’ s new inflation forecast introductory remarks by mr jean - pierre roth, chairman of the governing board of the swiss national bank, at the end - of - year media news conference, zurich, 16 december 2004. * * * economic growth in switzerland has lost some of its momentum. for this year, however, we still anticipate economic growth to be close to 2 %. in the coming year, we expect the economy to expand by 1. 5 % to 2 %. on the assumption that the three - month libor rate will remain unchanged at 0. 75 %, we expect an annual inflation rate of 1. 1 % in 2005 and 1. 3 % in 2006. less dynamic growth, the weaker us dollar and the decline in excess liquidity have dampened the anticipated inflationary pressure somewhat. the target range for the three - month libor rate will therefore be left unchanged at 0. 25 - 1. 25 % and the rate will again be kept in the middle of the range. the national bank ’ s monetary policy continues to have an expansionary effect. should unexpected developments push up the swiss franc sharply, we will take appropriate action. allow me to explain our decision. it is based on the outlook for price developments in the coming three years as summarised in our new inflation forecast. the graph depicts the current and the previous inflation forecasts. the dash - dotted green curve reflects the september forecast. like the current forecast, it was based on the assumption of the three - month libor rate remaining unchanged at 0. 75 % in the following three years. we can see from the graph ( blue line ) that inflation in the third quarter of this year was insignificantly higher than we had forecast in september. the dashed red curve represents the new forecast. it begins in the fourth quarter of 2004 and ends in the third quarter of 2007. the new forecast differs from the previous ones in three points. firstly, the projected inflation is higher until the third quarter of 2005. secondly, the inflationary uptrend sets in half a year later. and thirdly, inflationary pressure has decreased in the long term, which is evidenced by the lower - lying curve. there are significant economic facts behind these three deviations, which i would like to comment on. 1. slightly higher inflation in 2005 the increase in the anticipated inflation until the third quarter of 2005 is predominantly attributable to the rise in oil prices.

prospects. the assessment of inflation prospects in the longer term depends on a number of factors, such as the development of monetary and credit aggregates and different asset prices. long - term forecasts are fraught with a high degree of uncertainty. in spite of this, a central bank must make a sound assessment of the effects of its monetary policy in the longer term. the need for a forward - looking stance is due to the fact that monetary policy has its strongest effect on prices only after a lag of two to three years. m1 was 5. 4 % below the year - earlier level in november ; m2 was down by approximately 3 %. m3 increased by 1. 4 %. although there is still ample provision of liquidity, it has dwindled as a result of the latest developments. compared with the september assessment, we have therefore made a downward correction of our inflation projection for the years 2006 and 2007. according to our september forecast - based on an unchanged three - month libor rate of 0. 75 % inflation would have climbed to 2. 9 % in the second quarter of 2007. with an unchanged monetary policy, the current forecast predicts an increase of only 2. 3 %. at the end of the new forecasting horizon in the third quarter of 2007, inflation would stand at 2. 6 %. the lower long - term inflation forecast suggests that there is currently more room for manoeuvre in maintaining an expansionary monetary policy course. 4. exchange rate the dollar has plummeted since october. it has lost 7. 9 % vis - a - vis the swiss franc. notwithstanding the sharp fluctuations of the dollar, the franc has remained virtually unchanged against the euro. the depreciation of the dollar has a direct impact on the swiss economy in that it undermines the price competitiveness of the export industries. moreover, a weak dollar also exerts an indirect influence by clouding growth prospects in europe, our largest sales market. the appreciation of the franc has tightened monetary conditions. at the same time, the weaker dollar has a dampening effect on import prices and, consequently, on inflation prospects. 5. continuation of expansionary monetary policy i will now come to my concluding remarks. the inflation forecast shows that the process of normalisation of monetary policy has not yet ended. in light of my comments it should nevertheless not be difficult to understand our decision to leave the three - month libor rate at 0. 75 %. since inflationary