The aim of preventing inflation expectations from becoming entrenched below the operational target of 2.5 per cent was one of the main reasons that the interest rate was lowered to a very low level in 2003 and 2004, when inflation receded and approached zero. Low interest rates stimulated demand and output and have gradually led to prospects for higher inflation, to which we have responded by increasing the interest rate. Consumer price inflation is still fairly low, but capacity utilisation is now at such a high level that inflation is projected to move up gradually to 2.5 per cent. Higher interest rates will contribute to a gradual decline in capacity utilisation so that inflation will not become too high. In spite of several years of fairly low inflation, inflation expectations, as for example these – and not necessarily precisely – are measured by TNS Gallup’s expectations survey, have held up around the inflation target. Even if there has been a longer period of low and relatively stable inflation expectations, we must be alert to developments that may change this. Norway’s and other countries’ economic history show that inflation and inflation expectations can become unhinged. There are many self-regulating mechanisms in the economy, but inflation does not regulate itself. Through history, monetary policy has in various ways been geared towards providing the economy with a nominal anchor. From the mid-1800s, many countries decided to peg the value of money to gold. Norway switched from the silver standard to the gold standard in 1874.
Since the introduction of the euro in 1999, the average interest rate on three-month euro deposits has been 3%, while the three-month Swiss franc rate has been 1.4%. If we assume a difference of about 1% in the expected level of inflation between the euro area and Switzerland, the Swiss real interest rate advantage accounts for 60 basis points. •  Switzerland is also a firm believer in flexible exchange rates. Our monetary regime has been unchanged since 1973, when the peg to the US dollar was removed. Today, the Swiss franc is freely determined by market forces. Our last foreign exchange intervention dates back to 1995 – and that was a coordinated action in favour of the US dollar! •  And what about the European issue? As you know, we are not a member of the European Union; nor do I foresee Switzerland joining the EU in the near future. The Swiss people remain sceptical about the efficiency of the Union and are very aware of what they stand to lose in terms of political rights and economic freedom in the event of integration. But our relationship with the EU is of key importance, since Europe accounts for two-thirds of our foreign trade. In order to secure our access to the European market and to avoid discrimination, we concluded two packages of bilateral agreements with the Union – in 2002 and 2004.