In view of the limited size of the domestic capital market compared to other countries, foreign currency purchases seemed the most appropriate course of action for Switzerland. This allowed for the absorption of extreme exchange rate developments, which could have triggered a deflationary dynamic. In absorbing the upward pressure on the Swiss franc, the SNB may have taken on a higher balance sheet risk, however, in doing so, it countered the risk of a deflationary trend. Although the Swiss franc has appreciated sharply since the beginning of the year, the deflation threat has declined as the economic recovery has strengthened. The appreciation of the Swiss franc has impaired the competitive position of Swiss exporters. However, the negative impact on export demand has been reduced by robust economic growth in the economies importing Switzerland’s goods and services. Chart of conditional inflation forecast  I would now like to comment on the new, conditional inflation forecast in more detail. The (dashed) red curve on the chart represents the new, conditional inflation forecast. It shows the future path of inflation, assuming that the three-month Libor remains constant at 0.25% over the entire forecast horizon, and it covers the period from the fourth quarter of 2010 to the third quarter of 2013. For purposes of comparison, the (dash-dotted) green curve shows the inflation forecast published in September, which was also based on the assumption of a three-month Libor of 0.25%. The new conditional forecast shows that inflation remains low for 2011 and 2012.
In view of the expansionary monetary conditions, lending business remained brisk. According to the SNB survey on bank lending, banks maintained their lending standards for companies and households in the third quarter of 2010. Several banks reported that household demand for mortgages increased again. This is reflected in the continued high growth rate of mortgage volume. Moreover, real estate prices continue to rise. The situation on the mortgage and real estate markets still requires the full attention of the SNB. 2  BIS Review 173/2010  Impact of foreign exchange market interventions on the SNB balance sheet  Since the beginning of the financial crisis, the SNB balance sheet has lengthened considerably and its composition has changed, in particular due to the SNB’s foreign exchange market interventions. Since the beginning of 2010, the balance sheet total has increased from CHF 207 billion to some CHF 280 billion. Moreover, the significant appreciation in the Swiss franc has resulted in considerable exchange rate losses on the SNB’s foreign currency investments. My colleague, Thomas Jordan, will take a closer look at the risks for the SNB associated with the lengthening of the balance sheet. After the beginning of the financial crisis, the SNB lowered money market interest rates to virtually zero. Despite these decisive reductions in interest rates, the Swiss economy faced the threat of deflation from March 2009 onwards. This required the SNB, as part of its mandate, to undertake a further monetary policy easing.