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Monetary policy report 2000

Background

At the end of 1999, the National Bank for the first time published a medium-term inflation forecast and a target range for the three-month Libor rate. It fixed the target range at 1.25% - 2.25%. This implied a tightening of monetary policy by the National Bank so as to ensure that inflation remained below 2%. The medium-term inflation forecast showed an average inflation rate of 1.5% for 2000 and a slight increase to 1.8% by 2002. This rise in inflation reflected the anticipated economic upswing, which - so experience has shown - would normally go hand in hand with upward price trends.

Tightening of the monetary reins in the first half-year

For 2000, the National Bank forecast real economic growth of 1.8%. Very soon after the turn of the year, it became evident that the economic upswing in Switzerland would be considerably boosted by the strengthening international economy. At the same time, the continuing weak trend of the Swiss franc led to an undesirable easing of monetary conditions in Switzerland. In order to ward off the associated threat of inflation, the National Bank rapidly tightened the monetary reins. Until mid-year, the National Bank increased the target range for the 3-month Libor rate by a total of 1.75 percentage points to 3%-4%.

Two-fold increase in the interest target band in the first quarter

As a first step, the National Bank increased the target range by half a percentage point to 1.75%-2.75% on 3 February after already having moved towards the upper part of the target band in the second half of January. On 23 March, on the occasion of its quarterly assessment of the economic situation, the National Bank decided once more to tighten monetary policy considerably and increased the target range for the three-month Libor rate by 0.7 percentage points to 2.5%-3.5%. The data published after the interest rate adjustment in early February showed that the Swiss economy had gained quite drastically in momentum in the second half of 1999. Shortages in the labour market were increasingly in evidence. Additional inflation risks emanated from the further decline of the Swiss franc, notably vis-à-vis the dollar.

Further interest rate step in mid-June

On 15 June, the National Bank increased the interest rate target range by another half a percentage point to 3%-4% after having permitted the three-month Libor rate to rise to the upper part of the target band at the beginning of the month. A review of the inflation forecast issued at the end of 1999 had led to the conclusion that the tightening of monetary policy implemented so far would not suffice to maintain price stability in the medium term. At the same time, the National Bank pointed out that despite a further interest rate hike a temporary increase in inflation in 2001 to more than 2% was unavoidable.

Unchanged interest target range in the second half of the year

At the quarterly assessment of the economic situation in September, the National Bank left the interest target range unchanged. A review of monetary policy had shown that the implemented policy was sufficiently restrictive to prevent economic overheating and ensure price stability in the medium term. Important indicators led to the expectation that the broadly-based economic upswing would continue, albeit at a more leisurely pace than at the beginning of the year. In addition, the Swiss franc had appreciated even further against the euro, which was tantamount to a slight tightening of monetary policy.

No sign of a long-term price rise

The development of the monetary aggregates in 2000 did not point to a long-term threat to price stability. The broadly defined money stock M3, comprising currency circulation, sight and other transaction deposits of the nonbank public plus savings and time deposits, declined slightly in the course of the year. In the fourth quarter, M3 fell short of the corresponding previous year's level by 1.2%. The aggregate M3 was thus at the same level as three years earlier.

Small rise in the monetary base

The seasonally-adjusted monetary base rose by 1.1% in 2000, thus growing less markedly than in the previous year (2.4%). Banknote circulation, which comprises roughly 90% of the monetary base, increased by 2.4%. At the same time, the banks' sight deposits at the National Bank fell by 12%. The decline in demand for sight deposits was due largely to the introduction of intraday liquidity. The fluctuations of sight deposits, which were considerably stronger than in the previous year, reflect mainly the transition from the steering of sight deposits to the steering of interest rates.

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