First, the international economic outlook has deteriorated markedly, impacting heavily on forecasts for the Swiss economy. Second, the financial market crisis has intensified since midSeptember. Finally, prices for raw materials and oil have plummeted and this, combined with the worsening of the economic outlook, has led to a marked improvement in the inflation outlook. I will deal with these three points in turn. Global economic outlook In September, our main focus was the possibility of sharply contracting growth in the most advanced economies. Now, we know that economic activity will decline simultaneously in the US and Europe, while it will slow appreciably in emerging economies. Whether one can call this a recession or not depends on the definition used, and is now merely a question of semantics. In the US, GDP is likely to decline substantially during the current quarter, following its slight contraction in the third quarter. Industrial production, which had hitherto been remarkably stable, fell sharply by 4% between July and October. Moreover, unemployment, which had also been stable for some time, rose rapidly, reaching 6.7% in November – a level not seen since 1994. The sudden worsening of the situation is above all due to the fall in household spending. Households saw their financial situation deteriorate sharply due to the loss in value of their real estate and financial assets, while also suffering – until recently – a progressive erosion of their purchasing power through the continuous rise in fuel prices.
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.