jean - pierre roth : review of the swiss economy introductory remarks by mr jean - pierre roth, chairman of the governing board of the swiss national bank, at the half - yearly media news conference, geneva, 14 june 2002 * * * the national bank has decided to leave the target range for the three - month libor rate unchanged at 0. 75 % - 1. 75 %. for the time being, the three - month libor is to be kept in the middle of the target range. since the last assessment of 21 march 2002, the national bank has again adjusted its monetary policy. on 2 may 2002, we lowered the target range for the three - month libor by 0. 5 percentage points to the current level. some time earlier, on 27 march 2002, we had already lowered repo rates by approximately 10 basis points, which led to a corresponding change in the three - month libor. in both cases, we acted in response to the appreciation of the swiss franc, which had led to an undesirable tightening of monetary conditions. since march 2001, the national bank has eased its monetary policy substantially, lowering the target range for the three - month libor by a total of 2. 25 percentage points. after the cyclical downturn in the second half of last year, there are now signs that the world economy is starting to pick up, which will also benefit economic activity in switzerland. however, uncertainties regarding the upswing in switzerland persist. for the time being, the national bank will thus maintain its expansive monetary policy stance. this does not jeopardise price stability. assuming that the three - month libor rate will remain stable at 1. 25 %, average annual inflation is expected to hover between 0. 9 % and 1. 6 % in the next three years. for 2002, the national bank still anticipates a growth rate of around 1 %. the difficult situation of the world economy has had a marked influence on the development of business activity in switzerland in the past few months. following a decline in the third quarter 2001, the economy stabilised in the fourth quarter, and in the first quarter 2002 gross domestic product again rose somewhat. notably exports and capital spending were on the decline during this period, while private and government consumption as well as the construction industry exerted a stabilising influence. on the whole, the development in the past six months fulfilled our expectations. we assume that the swiss economy will grow extremely moderately

. the underutilisation which still prevails continues to restrain consumer prices in switzerland. declining inflation abroad and the slightly stronger swiss franc are having a similar impact by dampening imported inflation. thus the snb ’ s inflation forecast shows that there is no risk of inflation in the foreseeable future. in 2014, inflation in switzerland is likely to amount to only 0 %. in addition, the international environment is still giving rise to high levels of uncertainty. consequently, the danger that the swiss franc, as a safe haven, might suddenly be subject to further upward pressure has not been averted. short - term interest rates are practically zero. for this reason, the minimum exchange rate is the right tool to avoid an undesirable tightening of monetary conditions, since an appreciation of the swiss franc would lead to a further decline in import prices and a renewed threat of deflation. given this situation, the snb is maintaining the minimum exchange rate of chf 1. 20 per euro. we remain ready to enforce the minimum exchange rate, if necessary, by purchasing foreign currency in unlimited quantities, and to take further measures as required. i would like to take this opportunity of stressing, once again, that the minimum exchange rate does not represent a peg to the euro. the swiss franc is able to move freely above chf 1. 20 per euro. as i said, it is high, and should weaken with time. for many years, interest rates have been at a low level due to the overall economic situation. however, the danger of a longer period of low interest rates is that imbalances can build up, and we can indeed observe such a development in the swiss mortgage and real estate markets. allow me therefore to give you our assessment of this situation. mortgage and real estate markets and countercyclical capital buffer the swiss residential mortgage and real estate markets have been growing strongly for some time, giving rise to imbalances. some time ago, these reached a level, in the view of the snb, that poses a risk to the stability of the banking system and hence the swiss economy. why does the snb not simply increase interest rates in order to slow down the mortgage and real estate markets? although an increase in the interest rate would have a dampening effect, it would, at the same time, intensify upward pressure on the swiss franc and, given the current situation, threaten price stability. consequently, an interest rate