Since 2004, we have lifted the Libor target range in ten steps to bring the interest rate to a level that is in line with price stability in the medium term. Thanks to this preventive approach, the inflation outlook has not deteriorated despite the inflationary bouts of recent months. Moreover, the performance of our monetary aggregates strengthens our belief that price stability can be maintained. Contrary to what we see in neighbouring countries, growth in Switzerland’s monetary aggregates has been compatible with stable medium and long-term inflation for a number of years already. Successive interest rate hikes have created the conditions for transfers from sight and savings deposits to term deposits, which generally earn better returns. Thus, in 2007, M1 and M2 continued declining, while M3 recorded only modest growth. Consequently, the money overhang which existed since 2003 has now dissipated – a development which bodes well for future price stability. Finally, the foreign exchange market has largely corrected the previous slide in the Swiss franc against the euro, which had made imports more expensive. The Swiss franc’s rebound creates a more favourable environment for the preservation of price stability in the medium term. This change in monetary conditions enabled us to leave interest rates unchanged at our monetary policy assessment in March. Mixed outlook for 2008 Even though Switzerland’s economic performance is still excellent, 2008 is fraught with considerable uncertainties. The situation on the financial markets has not yet stabilised, and the global economy is slowing.
Our economy, with its important financial sector and strong presence on the international markets, will not remain unscathed. In addition, the increase in commodity prices, in particular the price of oil, is triggering an inflationary effect. These different factors pose a predicament in terms of monetary policy, and the resultant uncertainty this causes is not exactly beneficial for Swiss companies. I have every confidence, however, that Switzerland will navigate these troubled waters without any major problems. On the one hand, our economy is very competitive. Thanks to the reforms implemented in recent years, Switzerland is well placed to adjust to the needs of the global economy and cope with pressure on the foreign exchange markets. On the other hand, our careful policy in favour of a gradual normalisation of interest rates, which we have been pursuing since 2004, has resulted in a steady tightening of monetary conditions and should ensure price stability in the medium term. On this positive note, I would like to close my remarks. Thank you for listening and, above all, thank you for supporting the National Bank in its efforts to ensure monetary stability in Switzerland. BIS Review 50/2008  5