Jean-Pierre Roth: The Swiss National Bank’s new inflation forecast Introductory remarks by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the end-of-year media news conference, Zurich, 16 December 2004. *  *  *  Economic growth in Switzerland has lost some of its momentum. For this year, however, we still anticipate economic growth to be close to 2%. In the coming year, we expect the economy to expand by 1.5% to 2%. On the assumption that the three-month Libor rate will remain unchanged at 0.75%, we expect an annual inflation rate of 1.1% in 2005 and 1.3% in 2006. Less dynamic growth, the weaker US dollar and the decline in excess liquidity have dampened the anticipated inflationary pressure somewhat. The target range for the three-month Libor rate will therefore be left unchanged at 0.25-1.25% and the rate will again be kept in the middle of the range. The National Bank’s monetary policy continues to have an expansionary effect. Should unexpected developments push up the Swiss franc sharply, we will take appropriate action. Allow me to explain our decision. It is based on the outlook for price developments in the coming three years as summarised in our new inflation forecast. The graph depicts the current and the previous inflation forecasts. The dash-dotted green curve reflects the September forecast. Like the current forecast, it was based on the assumption of the three-month Libor rate remaining unchanged at 0.75% in the following three years.
We presume that oil prices will tend to go down. Consequently, inflationary pressure will subside somewhat, particularly towards the end of 2005. With an unchanged monetary policy, we are likely to see an inflation rate of 0.9% in the first quarter of 2006. 2. Continued recovery  In order to assess inflation in the medium term, economic prospects are paramount. During a phase of economic recovery, as we are currently experiencing, how rapidly the capacity utilisation rate increases is important from a monetary policy perspective. Even though GDP growth in the fourth quarter of 2004 is likely to be lower than we projected in the September assessment, we expect the Swiss economy to expand by close to 2% this year. The upswing will continue next year. We anticipate a growth rate of 1.5% to 2% for the whole of 2005. The fact that the economy braved the oil price hike and the stronger franc is testimony to a robust recovery. There is less uncertainty now as to the inflation prospects for next year. Utilisation of economic resources, which is slowly increasing, will not lead to any additional pressure on prices in 2005. As can be gleaned from the new inflation forecast, improved capacity utilisation is likely to have an impact on price development only in the course of 2006. 1/3  The current inflation forecast for the medium term, ie for the coming two years, is characterised by a similar course to the one charted in September.