##erted by international competition. this will have a dampening effect on the domestic price level. all of these factors mean that some of the gains in productivity will be passed on to consumers in the form of price reductions. since there is a considerable lag between the adoption of monetary policy measures and their impact on prices, monetary policy does not affect price developments in the near term. consequently, the national bank is guided by the medium - term inflation outlook rather than the short - term forecast. the inflation forecasts published since 2003 show high rates of inflation at the end of each forecast horizon. this makes it clear that we cannot continue our expansionary monetary policy for an unlimited period of time. the three - month libor was already lifted in june and september 2004, each time by 25 basis points. because the economy weakened in the fourth quarter of 2004, there was an improvement in the inflation outlook at the monetary policy assessments of december 2004, and march and june 2005. consequently, a decision not to undertake further increases in the rate of interest was appropriate. however, the forecast of mid - september 2005 indicated that there would be no further improvement in the inflation outlook. nevertheless, we decided not to increase interest rates at that time. we determined not to take any action because of the fact that oil prices had attained record heights just before our monetary policy assessment. it was not possible at the time to fully assess the impact on the economy and on inflation. if monetary policy had remained the same at this assessment, the medium - term inflation outlook would once again have been unchanged. in the meantime, however, the room for manoeuvre available to monetary policy has declined. our inevitable concerns with respect to the high price of oil in september have been dissipated by the favourable developments in the economy. as a result, we have decided to increase the target range for the three - month libor by 0. 25 percentage points. consequently, this decision is in line with the statements we made at the last monetary policy assessment. inflation forecast graph i now turn to the current inflation forecast, which is based on the assumption of a change in the threemonth libor, to 1. 0 %. the graph depicts the current and the previous forecasts. the dashed red curve represents the new forecast, which covers the period from the fourth quarter of 2005 to the third quarter of 2008. it summarises the inflation outlook, following today ’ s increase in the rate of interest. the dash - dotted green curve shows

philipp hildebrand : the swiss national bank ’ s view of international financial markets against the background of trends in the united states introductory remarks by philipp hildebrand, member of the governing board of the swiss national bank, at the end - of - year media news conference, zurich, 12 december 2003. * * * the past year was a turbulent one for the international financial markets, which were essentially influenced by trends in the us. during the first half of 2003, market developments were shaped by economic and deflation fears as well as by the war in iraq. in this environment, equity markets reached an annual low in march. in june, bond market yields fell to their lowest level. the second half of the year saw an economic recovery in the us, which is now spreading to other economic regions as well. capital markets long - term yields on swiss paper rose by approximately 60 basis points from their low in june to roughly 2. 7 %, approximately tracking yields in the euro area. in both cases, yields followed the us market very closely, albeit with modest fluctuations ( see graph 1 ). under the present economic conditions, the interest rate environment in switzerland is still viewed as attractive by consumers. the high level of new fixed - rate mortgages is an indication of this sentiment. the higher swiss yields reflect the improved economic outlook and not inflation expectations, which are modest given that there is still pronounced underutilisation of capacities. in contrast to capital market yields, money market yields were decidedly stable. the three - month libor remained almost constant at 0. 25 %. the global trend in capital market yields was chiefly determined by long - term yields in the us, which themselves were shaped by the recovery of the us economy. in the early summer, deflation fears had dragged the yield on ten - year us government bonds down to 3. 1 % - a level last reached at the end of the 1950s. in july and august, however, positive economic data pushed the yield right up to 4. 6 %. convexity hedging was one of the factors contributing to the unusual scale of the turnaround. as interest rates fell in the early summer, the refinancing of existing mortgages - which is possible in the us at any time - had triggered extensive buying of government bonds. us investors holding substantial mortgage portfolios had to make these purchases in order to keep the residual maturities of their portfolios constant. when interest rates rose, therefore, the correction was similarly swift