Monetary policy decisions 2009
On 10 March 2010, the Governing Board of the Swiss National Bank submitted its accountability report for 2009 to the Federal Assembly in accordance with art. 7 para. 2 of the National Bank Act. The following accountability report is submitted to the Federal Council and the General Meeting of Shareholders for information purposes only and does not require their approval.
The SNB’s Governing Board conducts an in-depth assessment of the monetary policy situation in March, June, September and December. Each of these assessments results in an interest rate decision. If circumstances so require, the Governing Board may adjust the target range for the three-month Swiss franc Libor between regular assessment dates. In 2009, however, this was not the case.
Monetary policy challenges in 2009
As in the previous year, monetary policy was rendered more complicated by the high level of uncertainty about how the main macroeconomic and financial variables would develop. The SNB faced major challenges concerning both its immediate goals and the implementation of its monetary policy. It was mainly motivated by the desire to dampen the effects of the economic and financial crisis on the Swiss economy and to limit deflation risks, without losing sight of the objective of maintaining price stability in the medium and long term.
Supporting the economy
In an effort to support the economy and lessen the impact of the economic and financial crisis, the SNB successively lowered the Libor target range to 0.0–1.0% during the last quarter of 2008. In March 2009, it reduced the range by 25 basis points, and retained this new target range of 0.0–0.75% for the rest of the year. The National Bank’s intention was to bring the Libor down into the lower end of the target range, at around 0.25%. The one-week repo rate, which is used to manage the Libor, had already been at 0.05% since the end of 2008.
Countering the risk of deflation
In addition to the difficult economic climate and the substantial degree of uncertainty on financial markets, the high risk of deflation was a further area of concern for the SNB. In spring, the economic crisis and the appreciation of the Swiss franc began to pose a serious threat to medium-term price stability. Any further appreciation would have amplified the deflation risk by, on the one hand, creating unfavourable conditions for exports and thereby exacerbating the recession, and, on the other, leading to a decline in import prices.
For this reason, the SNB decided in March to relax monetary conditions even further by substantially increasing the supply of liquidity. In addition to reducing the target range for the three-month Libor, it introduced exceptional instruments for this purpose, including currency swaps, repos with longer terms, purchases of Swiss franc bonds issued by domestic private sector borrowers and foreign exchange market interventions. It maintained this expansionary monetary policy course practically unchanged throughout the rest of 2009.
Guaranteeing price stability
With the risk of deflation receding somewhat as the economy recovered, monetary policy at year-end faced the challenge of how to reconcile short and long-term requirements. The long-term inflation outlook called for a gradual tightening of monetary policy, whereas the uncertainty over the way in which the economy and prices would develop in the short term suggested that tightening could be postponed.
The inflation forecast published in December 2009 gave the SNB sufficient leeway to maintain its expansionary monetary policy. The SNB also announced that it would take firm action to prevent any excessive appreciation of the Swiss franc against the euro. It noted, however, that it would not be possible to maintain such a policy indefinitely without compromising medium and long-term price stability.
Quarterly assessment of 12 March
In the months preceding the first assessment of 2009, economic activity declined sharply in the US and Europe. The crisis, which had started in the financial markets, had spilled over to the non-financial economy, and its effects were being felt throughout the global economy. Against this background, the SNB made a substantial downward revision to its growth forecasts for the major economies, in particular for the US (2009: –1.8%; 2010: 1.9%) and Europe (2009: –1.1%; 2010: 0.5%).
In Switzerland, annualised GDP had fallen by 1.2% in the fourth quarter of 2008. By the time of the assessment in March, the economy was being severely affected by the crisis, with Swiss exports particularly hard hit by the collapse in global demand. Moreover, unemployment was rising steadily, bringing the risk of a levelling-off in private consumption. Consequently, the National Bank revised its forecast downwards and projected that GDP for 2009 would be between –2.5% and –3%.
At the time of the assessment, the growth rates for the M1 and M2 monetary aggregates were relatively high, while M3 growth remained moderate. The volume of base money had doubled within the space of a year, reflecting a huge increase in the demand for liquidity from the banking sector. The rate of growth in lending volumes had been slowing since the beginning of the year. Yet mortgage loans remained unaffected – growth in this segment had gathered pace since autumn 2008, reaching 3.8% in January 2009. Overall, therefore, the situation on the Swiss lending market was better than that in the rest of the world.
The Swiss franc had gained markedly in value since the onset of the international financial crisis in August 2007. This trend had accelerated after the December 2008 assessment, and, by the time of the March 2009 assessment, had given rise to an unwelcome tightening of monetary conditions. Inflation, having peaked at 3.1% in July 2008, had fallen back to 0.2% by February. This was largely attributable to the slump in oil prices and the appreciation of the Swiss franc. The SNB expected that inflation would turn negative over the course of 2009.
In response, the National Bank decided to bring interest rates down further, and narrowed the target range for the three-month Libor to 0.0– 0.75%. Its aim was to bring the Libor down into the lower end of the target range, at around 0.25%. It also decided to substantially increase the supply of liquidity by entering into long-term repos, purchasing Swiss franc bonds issued by domestic private sector borrowers and buying foreign currency on the foreign exchange market, in order to prevent the Swiss franc from appreciating further against the euro, as well as to improve financing conditions.
In addition, from autumn 2008, the SNB negotiated EUR/CHF swap agreements with a number of countries to facilitate refinancing for banks that had granted loans in Swiss francs in those countries. This allowed the SNB to counter the rise in the Libor generated by additional demand for Swiss francs from abroad.
The inflation forecast published together with the interest rate decision was based on a three-month Libor of 0.25%, and showed negative inflation for 2009, partly as a result of a base effect from falling oil prices. For 2010 and 2011, inflation was expected to remain low due to the weak state of the economy, despite the low interest rate environment. At the end of the forecast horizon, inflation increased slightly, reflecting the fact that a Libor of 0.25% would not guarantee price stability in the medium and long term.
Quarterly assessment of 18 June
During the first quarter of 2009, economic activity had declined more sharply than the SNB had expected, especially in Europe and Japan. By contrast, at the time of the June assessment, the financial markets, business activity and consumer confidence were all sending out positive signals. The SNB thus judged the economic risks to be slightly lower, but left its scenario for the global economy essentially unchanged. It now projected that growth rates would already turn positive in the second half of the year in the US and at the beginning of 2010 in Europe.
At the start of 2009, the Swiss economy had deteriorated further, with annualised GDP declining by 3.2% in the first quarter. Exports plummeted around the time of the assessment, and the level of capacity utilisation in manufacturing fell substantially. Against a background of rising unemployment, domestic demand stagnated. The SNB projected that this situation would persist for the next few months, and continued to forecast GDP growth of between –2.5% and –3% for 2009 as a whole.
M1 and M2, which are highly sensitive to changes in interest rates, were showing very strong growth at the time of the assessment. As hitherto, this was attributable to the public’s preference for the most liquid assets possible, which was also reflected in a decrease in time deposits. M3 was still growing at a moderate pace, suggesting that banks were hoarding liquidity, and only passing limited amounts on to other segments of the economy.
The total volume of lending was increasing at an annual rate of more than 3%, with mortgage lending growing particularly strongly as a result of the interest rate cuts. There was thus no sign of a credit crunch in Switzerland.
As regards the exchange rate, the measures introduced at the March assessment had borne fruit. Between March and June, the Swiss franc did not appreciate further against the euro and the volatility of the exchange rate was much reduced.
Inflation was close to zero in the first quarter. The SNB therefore projected that inflation would remain negative for the rest of the year, largely because of falling import prices. For domestic goods and services, however, inflation was expected to weaken over the course of the year, but to remain above 1%.
Given the ongoing risk of deflation, the SNB decided to keep the Libor target range at 0.0–0.75%, and the desired rate at 0.25%. It also announced that it would continue with the exceptional measures introduced in March.
The inflation forecast published together with the interest rate decision was thus still based on a three-month Libor of 0.25%. The forecast once again showed negative inflation for 2009 as a whole but had been revised upwards slightly as a result of the increase in the prices of commodities and energy. For the next two years, inflation was expected to be slightly positive, accelerating marginally at the end of the forecast period. This implied that the Libor could not remain at 0.25% indefinitely.
Quarterly assessment of 17 September
At its September assessment, the SNB projected that economic growth outside Switzerland would be higher than had been expected in June, and that the US and European economies would return to positive rates of growth before the end of the year. The SNB therefore made a substantial upward revision to its growth forecasts for the major economies in 2010, in particular for the US (2.4%) and Europe (2.2%).
The economic situation in Switzerland continued to be difficult. The rate of capacity utilisation was falling and unemployment was rising sharply. Nevertheless, the SNB revised its 2009 GDP forecast upwards, to between –1.5% and –2%. This was due to the fact that the global economy had returned to growth more quickly than expected, which also benefited Swiss exports. Moreover, the contraction in GDP in the second quarter had been less pronounced than anticipated.
Having grown strongly as a result of the generous supply of liquidity, base money decreased markedly in the months preceding the assessment. However, the amount of liquidity was still high at the time of the assessment, not just in the banking industry but also in the household and corporate sectors. The faster pace of M1 and M2 growth since the beginning of the year, as well as the more recent acceleration in M3 growth, were attributable to this.
The developments in lending and the monetary aggregates were a reflection of the very expansionary monetary policy. Mortgage lending, which accounts for around 80% of total lending, increased by 4.6% in July. At the time of the assessment, there was still no evidence of a credit crunch for either households or companies.
The export-weighted external value of the Swiss franc was stable just prior to the assessment, as was the exchange rate against the euro. This confirmed the effectiveness of the monetary policy measures implemented since March.
At the time of the assessment, inflation was still negative, and core inflation was trending downwards. Although the GDP forecasts had been revised upwards, inflation was still expected to be close to zero for 2010 and 2011. The risk of deflation thus persisted, despite having lessened since the June assessment.
In these circumstances, the SNB decided to leave its expansionary monetary policy unchanged. It held the Libor target range at 0.0–0.75% and continued to aim for a Libor of 0.25%. It also announced that it would continue to supply the economy with generous amounts of liquidity, and take firm action to prevent any appreciation of the Swiss franc against the euro.
The September inflation forecast was based on a three-month Libor of 0.25%. Both the negative inflation in 2009 and the acceleration of inflation projected for the beginning of 2010 were attributable to a base effect from energy prices. It was expected that, over the rest of 2010, inflation would remain persistently low, but that the output gap would close more rapidly than had previously been anticipated. Accordingly, the inflation forecast for 2011 rose, while that for 2012 exceeded 2%.
Quarterly assessment of 10 December
Since the September assessment, signs of a recovery in global economic activity had been gathering strength. The normalisation of conditions on the financial markets, as well as the monetary and fiscal stimuli, had prompted a recovery in manufacturing output. However, in a number of countries capacity utilisation was still low and access to credit remained difficult. Moreover, it was likely that the subdued labour market situation would weigh further on consumption. The SNB therefore kept its 2010 growth forecast for the US unchanged, but revised it slightly downwards for Europe (1.1%).
The Swiss economy, too, was on the road to recovery at the time of the assessment, with GDP having risen in the third quarter. Exports benefited from the recovery in global demand, making an improvement in the situation of the manufacturing industry probable. In view of the under-utilisation of production capacity, by contrast, there was unlikely to be any revival of equipment investment for the time being. In addition, consumption growth was expected to be held back by weakly growing income. For 2010, the SNB projected GDP growth of between 0.5% and 1%, following a figure of approximately –1.5% for 2009.
Having risen strongly until April 2009, base money declined again, while M1 and M2 showed substantial growth up to the time of the assessment. M3 growth, which had been modest for a long time, accelerated. This was a reflection of the public’s increased preference for liquid assets and was thus no cause for concern.
Growth in mortgage lending rose to 5.1% in the months prior to the assessment. Although growth in other lending was slightly lower, there was nevertheless no credit crunch in Switzerland.
The export-weighted external value of the Swiss franc had increased slightly since the previous assessment, mainly as a result of the weaker US dollar. Against the euro, by contrast, the Swiss franc remained stable.
At the time of the assessment, inflation was still negative, largely as a result of fluctuating oil prices and the associated base effect. The economic outlook suggested, however, that inflation would turn positive from the beginning of 2010.
Against this background, the National Bank decided to leave the Libor target range unchanged at 0.0–0.75% and the Libor at 0.25%. It announced that it would still provide the economy with a generous supply of liquidity, but would discontinue its purchases of Swiss franc bonds issued by domestic private sector borrowers. It would also continue to act decisively to prevent any excessive appreciation of the Swiss franc against the euro. In addition, the SNB pointed out, both to banks and to firms and households, the risks inherent in a relaxation of discipline in real estate financing.
The inflation forecast published together with the interest rate decision was based on a three-month Libor of 0.25%. Inflation rose in the short term, as a result of the base effect linked to the trough in oil prices reached one year earlier. The forecast suggested that inflation would fall back again over the course of 2010, despite the fact that economic growth was expected to pick up. From the beginning of 2011, the forecast showed a clear upward trend, with inflation projected to breach the 2% mark in the first half of 2012. This indicated that the Libor would have to be raised sooner or later.