When we make forecasts for variables such as output and inflation, we must at the same time have formed an opinion of the future interest rate path. Interest rate developments, in turn, must be considered in the context of other forecasts. The choice of interest rate path in forecasting is important because monetary policy influences developments in the economy primarily through expectations. I will come back to this later on in my speech. First I will focus on the role of the interest rate in Norges Bank’s projections. I will then move on to describe the analytical tools used by the Bank to arrive at a projection for future interest rates. Finally, I will discuss the uncertainty inherent in the projections. Choice of interest rate assumptions in forecasting Norges Bank seeks to achieve an interest rate path that provides a reasonable balance between the objective of bringing inflation up to target and the objective of stabilising developments in output and employment. This means we have to judge how these variables will develop in the period ahead and how they are affected by the interest rate. Hence, in order to make forecasts for inflation and output, we must also judge how interest rates will develop in the future. The interest rate can be approached in various ways in forecasting.
The first is the negative interest rate, which is currently –0.75%. This is charged on sight deposits held at the SNB by banks and other financial market participants. The second is our willingness to intervene in the foreign exchange market as necessary, while taking the overall currency situation into consideration. Our monetary policy is thus expansionary and aimed at easing pressure on the Swiss franc, thereby ensuring price stability in the medium term. Many feared a recession on the back of the discontinuation of the minimum exchange rate and the rapid appreciation of the Swiss franc. Yet our economy grew by 0.9% last year. This may not be a strong growth rate, but it is still a good sign. On the one hand, it reflects the flexibility and adaptability of Swiss companies and employees. On the other, the economy was also supported by our expansionary monetary policy. This contributed to the weakening of the Swiss franc over the course of the past year. It remains significantly overvalued, however. The slight increase in economic output in Switzerland is a positive development, particularly in view of the continued tentative recovery of the global economy. This hesitant recovery was accompanied by a collapse in commodity prices in 2015, in which both weak demand and increased oil production played a role. The drop in oil prices and the appreciation of the franc following the discontinuation of the minimum exchange rate pushed inflation in Switzerland into negative territory. Both factors produce a one-off downward adjustment in prices.