on 6 march 2003, short - term interest rates in switzerland fell to a very low level. since the opportunity costs for holding money were consequently reduced to practically zero, the demand for liquidity increased markedly. immediately following the interest rate reduction, annualised monthly growth rates of more than 15 % were observed for m3. once the demand for liquidity by companies and households has reached the desired higher level, liquidity should only increase in line with nominal gross domestic product and should not pose a threat to price stability. in actual fact, the growth rates of m3 have fallen recently, but nevertheless the economy has more liquidity at its disposal than is compatible with price stability in the medium term. according to our last forecast published in march, given an unchanged monetary policy and a threemonth libor of 0. 25 %, inflation could have climbed to 3 % in the fourth quarter of 2006. the current forecast shows that - on the assumption that the three - month libor will remain stable at 0. 5 % in the next three years - inflation will only rise to 2. 7 % by the end of 2006. at the end of the new forecasting horizon in the first quarter of 2007, inflation would slightly exceed 3 %. by taking a small step towards the normalisation of the short - term interest rate level, we are thus gradually and cautiously siphoning off excess liquidity in order not to jeopardise price stability in the long term either. financial markets is the economic analysis on which our inflation forecast rests in conformity with that of the financial markets? in the recent past, a flattening of the interest rate curve was observed in switzerland. interest rates for maturities of up to ten years in particular moved up. this shows that the financial markets have anticipated a somewhat less expansionary monetary policy. since economic activity began to pick up momentum more rapidly in switzerland than in the neighbouring countries, it became evident that interest rates would rise sooner, which enhanced the attractiveness of the swiss franc somewhat. nevertheless, the competitiveness of swiss companies remains intact. at the very long end of the interest rate curve interest rates have hardly moved, an indication of consistently low inflation expectations. the markets assume that the national bank ’ s monetary policy is in conformity with its goal of ensuring price stability in the long term. monetary policy still expansionary in march 2001, we initiated a series of interest rate reductions in response to the sluggish business climate and the enduring strength of the swiss

franc. in a particularly difficult international environment with deflationary trends we allowed the three - month libor to finally fall to a historic low of 0. 25 % in march 2003. for five quarters it persisted at this level. today ’ s adjustment of our monetary policy should not be seen as a changeover to a restrictive policy. our interest rate increase is merely to be regarded as an appropriate step towards more neutral monetary conditions following a lengthy period of extraordinary circumstances. it is an indication that we view economic prospects more optimistically and that we trust the economic upswing in switzerland to be robust. our monetary stance remains expansionary. every forecast and every decision is fraught with uncertainty and risks. should the economic recovery be delayed due to unexpected events or should the swiss franc appreciate markedly, we shall react appropriately. as in the past, the swiss national bank shall keep all its options open. observed inflation june 2004 inflation forecast on march 2004 with libor at 0. 25 % and of june 2004 with libor at 0. 5 % inflation forecast of june 2004 ( 98 kb )