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Monetary policy report 2002

Background

In December 2001, the National Bank lowered the interest rate target range for the three-month Libor to 1.25%–2.25% and published an inflation forecast assuming a constant interest rate of 1.75%. The forecast projected that inflation in Switzerland would temporarily drop to around 0.5% in the course of the year and would thereafter rise gradually to 1.5% by the end of the three-year forecasting horizon. As regards economic growth in Switzerland, the National Bank forecast a decline from an estimated 1.5% to approximately 1.0% in 2002. Initially, the National Bank therefore continued to implement its expansionary monetary policy; this was reflected, among other things, in the strong growth of the money stock M3.

Reassessment in view of unexpectedly weak economic growth and strong Swiss franc

During the year, two specific factors necessitated several reassessments of the situation. First, it became increasingly clear that there would be a delay in the expected recovery and that the original economic growth forecast of 1.0% would not be achieved. The second factor was the appreciation of the Swiss franc. The Swiss franc had already firmed markedly, both in nominal and real terms, in the wake of the terror attacks in the US of September 11. After the pressure had eased temporarily, the Swiss franc again appreciated slightly in April and July. The appreciation of the Swiss franc in conjunction with an unchanged interest rate would have had the same effect as a more restrictive monetary policy. This was undesirable against a background of unexpectedly weak economic growth and low inflation.

Lowering of the target range in May and July

The National Bank responded to these developments by lowering the interest rate target range in two steps. On 2 May, it lowered the target range by half a percentage point to 0.75%–1.75%. On 26 July, it made a further reduction by another half a percentage point to 0.25%–1.25%. Declining economic growth and a low inflation rate of less than 1% provided leeway for this marked overall interest rate cut.

No change in the target range at the scheduled assessments of the situation

At the quarterly assessments of the situation, the National Bank left the interest rate target range unchanged. In March there was no reason as yet to change monetary policy. Favourable data on economic activity in the US had even improved sentiment somewhat, which had also caused share prices to move up. In June and September account had to be taken of the fact that the interest rate target range had already been lowered twice, on 2 May and 26 July. At these two quarterly assessments of the economic situation, therefore, no need for additional measures emerged. In December, the National Bank again left the target range unchanged. It continued to implement its expansionary monetary policy in support of the expected upswing.

Signals for a medium-term increase in interest rates

The inflation forecast published in June 2002 indicated that, with an unchanged three-month Libor rate of 1.25%, inflation would rise rapidly and distinctly near the end of the forecasting horizon. Moreover, the inflation forecast published in December 2002, which is based on a constant three-month Libor rate of 0.75%, showed a similar development. Both forecasts thus signalled that the low interest rate level is appropriate for the time being but cannot be maintained in the long term without jeopardising price stability.

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