For purposes of comparison, the (dash-dotted) green curve shows the conditional inflation forecast published in March, which was also based on the assumption of a three-month Libor of 0.25%. Until the beginning of 2012, the path of the SNB’s new conditional inflation forecast lies above that of the previous quarter’s forecast. This is attributable to the assumption of higher oil prices compared to the previous quarter and somewhat higher import prices. The significant increase in the third quarter of 2011 is due to a base effect, because inflation in the corresponding quarter of 2010 was comparatively low. In addition, a one-off statistical effect can be expected in the third quarter of 2011. This is attributable to more frequent data collection in the case of prices for clothing and shoes; it also accounted for an increase in inflation in the first quarter. During the course of 2012, the path of the new forecast falls below that of March, due to the slowdown in inflation attributable to the latest appreciation in the Swiss franc. Towards the end of the forecast period, inflation rises briskly and exceeds the upper bound of 2%. This shows that the current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising price stability in the long term. Due to the risks mentioned previously, the conditional inflation forecast is, however, associated with a high level of uncertainty.
The SNB is concerned about exchange rate developments. The SNB forecasts are based on the premise that the exchange rate developments will stabilise in the medium term. Should the exchange rate again be subject to significant changes, a reassessment of the inflation outlook would be required. Since the last monetary policy assessment, the M2 and M3 aggregates have been growing at about 7% year-on-year. Some of this high growth rate is attributable to the current low interest rates. Overall, ample liquidity is available in the economy and this means potential risks for price stability in the long term. Mortgage lending has also continued to increase substantially, growing at a rate of 4.7% in April. In an environment of low interest rates and substantial advances in real estate prices, a high rate of growth in mortgages can harbour risks for financial stability. In the speech that follows, my colleague Thomas Jordan will outline for you the SNB’s Financial Stability Report. In view of the potential risks for the financial sector, the SNB continues to closely observe the situation on the mortgage and real estate markets. 2  BIS central bankers’ speeches  Chart of conditional inflation forecast The (dashed) red curve on the chart represents the new conditional inflation forecast. It shows the future path of inflation, assuming that the three-month Libor remains constant at 0.25% over the next twelve quarters, and it covers the period from the first quarter of 2011 to the first quarter of 2014.