If interest rate changes are to have the intended effect, confidence in monetary policy among financial market participants is an important precondition. Without such confidence, it is not possible to predict the impact of monetary policy on the real economy or on inflation. The difference between expected short-term rates in Norway and Germany 10 years ahead is a measure of confidence in monetary policy. In the period following the introduction of the inflation target, long-term forward rates have largely been around 1 percentage point higher than in Germany. Between ½ and 1 percentage point can probably be ascribed to Norway’s inflation target, which is higher than the price stability objective for the euro area. The narrow differential between Norwegian and German forward rates indicates that there is confidence that the inflation target will be achieved. If this confidence did not exist, the forward rate differential would probably have been far wider. Difference between Norwegian and German forward interest rates 10 years ahead. Per cent 1.4  1.4  1.2  1.2  1.0  1.0  0.8  0.8  0.6  0.6  0.4  0.4  0.2  0.2  0.0 01/01/99  0.0 01/10/99  01/07/00  01/04/01  01/01/02  01/10/02  Source: Norges Bank SG Gausdal 31.01.03  The forward rate differential against Germany has narrowed somewhat recently to around ½ percentage point. German forward rates have risen, while Norwegian forward rates have been more stable. The forward rate differential between the US and Germany is now close to zero.
Furthermore, recovery varies from one industry to another. Overall, the situation today is much better than many observers had expected at the beginning of 2015. The Swiss economy has once again demonstrated its flexibility by, for example, making swift adjustments to working hours and taking measures to improve production processes. In view of the structural changes taking place, this adaptability will remain key, regardless of developments in the international economy and exchange rates. I’m thinking here of traditional retailing, which increasingly has to compete with internet trading. Digitalisation, too, presents new challenges for manufacturing and finance that will continue to call for major efforts on the part of companies and staff in all the industries concerned. Current monetary policy  What challenges does this situation pose for our monetary policy? We have the statutory mandate to ensure price stability. In so doing, we must take due account of economic developments. Since the beginning of the year, the inflation rate in Switzerland has climbed above zero again (cf. chart 4). As is the case with our trading partners, this is largely driven by oil and food prices. Core inflation is somewhat lower, primarily because of underutilised production capacity. Our current forecast puts inflation in mid-2019 at around 1%. Given low inflation and underutilisation of production capacity, maintaining an expansionary monetary policy in Switzerland is the right course of action to take. The Swiss franc is still significantly overvalued.