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

credibility on the part of the central bank ( or the government ) could be devastating ; hence, there are strong incentives not to change the inflation objective absent sound technical reasons for doing so. indeed, adjustments to the numerical inflation objective or the inflation measure have rarely occurred in practice, and those adjustments have been consistent with clear scientific reasoning. 14 however, two important communication challenges arise in establishing a firm commitment to an explicit numerical inflation objective. first, a central bank must make clear that this commitment should not be regarded as implying that the central bank will continuously maintain inflation at the specified rate or even that the inflation rate will always return to that rate over a fixed time horizon, in the same way that one might pledge to lose 20 pounds in dodge ( 2002 ). mishkin ( 2008c ). two cases are worth noting here. first, the new zealand government raised the upper bound of the reserve bank of new zealand's inflation band by 1 percentage point in 1996 ( from 2 percent to 3 percent ) and raised the lower bound by 1 percentage point in 2002 ( from 0 percent to 1 percent ) ; these changes were consistent with the science of monetary policy, which had reached a consensus that allowing inflation to remain very close to zero could have detrimental consequences for the economy ( mishkin, 2008c ). second, the bank of england's inflation objective was modified in late 2003, establishing a target of 2 percent for the consumer price index ( cpi ) that replaced the previous target of 2 - 1 / 2 percent for the retail price index excluding mortgage interest ( rpix ). in that case, as noted by the governor of the bank of england, there were significant conceptual reasons for switching to the rpix as a measure of u. k. inflation, while the downward adjustment of 1 / 2 percentage point in the numerical objective reflected the average magnitude of deviations between cpi inflation and rpix inflation over the previous decade or so ( king, 2004 ). the next six or nine months. given that every economy is constantly buffeted by various shocks, it is generally neither feasible nor desirable to try to keep inflation constant at some specific level. thus, a commitment to keep inflation low and stable should be interpreted in a probabilistic sense – that is, policy will act in a manner that keeps inflation close to the inflation objective on average over time, and unusually large shocks may result in more persistent deviations from this objective. a second challenge stems from the fact that the