jean - pierre roth : inflation and economic activity – are we at a crossroads? summary of a lunchtime discussion by mr jean - pierre roth, chairman of the governing board of the swiss national bank and chairman of the board of directors of the bank for international settlements, at the “ geneva financial center ” organisation, geneva, 28 august 2006. the complete speech can be found in french on the swiss national bank ’ s website ( www. snb. ch ). * * * while the world economy is experiencing exceptionally vigorous expansion and inflationary pressure is contained, there is still a certain amount of uncertainty. will the economy turn down again and inflation accelerate? the swiss national bank is not working with a scenario of imminent weakness in the global economy, even if the rate of growth slows somewhat. certainly, the us economy appears to be heading for a soft landing, and economic activity in europe is also likely to increase less rapidly in the second half of the year. on the price front, the recent surge in inflation in the consumer price index was largely attributable to the cost of goods and services directly linked to energy prices, while core inflation remained at a relatively low level. given the slowdown in global spending and the normalisation of monetary conditions, inflationary pressures are likely to remain restrained. this assessment also applies to switzerland. the vitality of the manufacturing, financial and construction sectors, which have fuelled economic growth in our country over the past few quarters, is likely to diminish, particularly in view of the expected slowdown in global demand. growth in swiss gdp will probably amount to a little over 2. 5 % in 2006 ( this is a cautious forecast ), falling back slightly in 2007 yet remaining in the vicinity of 2 %. consumer prices rose 1. 4 % in july, marginally above our figure for core inflation, which at 1. 2 % is the highest since april 2002. however, these rates are well below the level of 2 % that we consider the upper limit for price stability. for 2006 as a whole, we expect the average rate of inflation to remain below 1. 5 %, and this is unlikely to change much in 2007. with respect to monetary policy, the healthy economic outlook in both the world and domestic economies, together with the high level of capacity utilisation in manufacturing, require us to further pursue normalisation of the target range for the three - month libor. this is particularly necessary in view of the significant relaxation in global

, such as job creation and improvement of incomes. for this reason, the inflation targeting framework retains the fundamental monetary policy paradigm of striking the optimum balance between inflation and output. apparently, when a central bank faces a dilemma of choosing between inflation and growth, inflation remains the priority. an example of this can be seen in the problems we faced last year, when world oil prices almost doubled. this disturbing trend became highly problematic for monetary policy because not only did it boost inflationary pressure, but also inhibit economic growth. many suggested that the central bank did not need to respond to this temporary surge in inflation. however, our view at the time was that despite the temporary nature of the disturbance, the inflationary impact emanating from the higher oil prices through increased price for other goods and services, such as transport and wages, would drive up core inflation. in this situation, the tight policy was necessary to prevent sustained escalation in public inflation expectations. the third characteristic of the itf is that monetary policy is implemented on a transparent basis with measured accountability. in my view, with elements like these, inflation targeting is more than a mere framework for monetary policy. inflation targeting promotes the good governance of a central bank. by announcing the inflation target to the public, the central bank commits itself to its achievement. uncertainty over future inflation will ease because public inflation expectations have a point of reference, and thus economic costs arising from uncertainty will also be reduced. communication to the public on the future monetary policy direction is also vital so that the public can anticipate the central bank monetary policy and to avoid ‘ surprises ’ that could trigger volatility in the money market. to strengthen policy effectiveness in this present age of disclosure, the central bank must also carry out a process of educating the public on what the monetary policy objectives are, the strategy for achieving these objectives, and what lies behind the decisions taken. one example involves the communication of the monetary policy response to soaring oil prices and risks from global imbalances at a time of weak conditions in the real sector and high unemployment. communications between the central bank and market players are also necessary, especially when financial markets are experiencing turbulence. in financial markets fraught with asymmetric information, the wealth of information held by the central bank is frequently of great benefit in mitigating this issue and thus preventing panic and herding by investors. in this regard, the credibility of the central bank is crucial. concluding remarks under the environment of financial integration, the task of