Although fuel prices have since receded, the effects of the price correction in the real estate sector – the root cause of the financial crisis – as well as the fall in stock market prices continue to be felt. In Europe in the third quarter, GDP recorded a second successive fall. Despite the recent depreciation of the euro, exports have been hit by the slowdown in global demand. This is especially true of Germany, which is highly export-dependent. By prompting a revision of plans to expand production capacity, first in the export industry and then in the upstream production chain, the fall in exports has led to a downturn in demand for equipment  BIS Review 157/2008  1  investment. Moreover, in some countries, for instance Spain and Ireland, construction activity has been affected by a significant correction in property prices. The picture is more mixed in Asia. Japan and some emerging economies in the region will probably not be able to escape a brief recession, but on the whole economic activity should continue to advance, albeit less strongly than previously expected. In addition, the emerging economies in Latin America and Eastern Europe, which until now have been heavily dependent on capital inflows, could experience a marked slowdown in growth. Thus, what was merely a risk scenario at our September assessment is now becoming reality. The advanced economies have more or less moved into recession simultaneously. The crisis in the financial sector has finally spread to the rest of the economy.
By contrast, the inflation outlook has improved appreciably. This has increased the SNB’s room for manoeuvre. Finally, there is a risk that the financial crisis will cause a deterioration in financing conditions for the economy as a whole. These are the considerations that have prompted today’s decision to cut the three-month Libor target range by another 50 basis points. Given the expected deterioration in the Swiss economy and the imponderables linked to the long and variable monetary policy transmission lags, a further rate cut appears appropriate. With this action we are reducing, to the extent possible, the risk of an even more pronounced economic downturn. Inflation forecast chart How has our inflation forecast been revised? The dashed red curve on the chart represents the new forecast. It covers the period from the fourth quarter of 2008 to the third quarter of 2011, and maps the future development of inflation on the assumption that the three-month Libor remains unchanged at 0.5% over the forecasting period. For purposes of comparison, the dash-dotted green curve shows the inflation forecast of the September monetary assessment, based on a three-month Libor of 2.75%. The new forecast shows a rapid fall in inflation over the next few quarters. It drops back below the 2% mark as from the fourth quarter of this year.