As we have shown in the past, monetary policy has a high capacity to adjust to changes in the macroeconomic scenario. This flexibility, combined with a financial system prepared to deal with risk scenarios, allows monetary policy to play a key role in mitigating their impact of these changes on the national economy. Let me begin by reviewing the most likely scenario for the next to years in our view and its implications for inflation and monetary policy. Macroeconomic scenario To assess the future course of monetary policy, the implications of both external and internal developments have to be taken into account. Worth singling out are the reaction of local financial markets to the external turmoil, the response of the economy to the earthquake and tsunami of last February and the trends of output and demand in the coming quarters. The world economy has turned more volatile. After several quarters of gradual normalization and relative financial calm, the international scenario presented significant tensions during the second quarter of 2010. The weak financial situation in some European countries spread to other economies and banking systems, and at the same time raised doubts about the effectiveness of existing crisis resolution mechanisms. As underscored in the IEF, the intensity and speed with which these events have occurred reflect the economic and financial fragility that still persists in advanced economies following the crisis of 2008. In many of these countries, banks’ balance sheets still include deteriorated assets, while facing major refinancing needs for 2010.
Banks’ sight deposits held at the SNB will be remunerated at the SNB policy rate of 1.75% up to a certain threshold. Sight deposits above this threshold will be remunerated at an interest rate of 1.25%, and thus still at a discount of 0.5 percentage points relative to the SNB policy rate. Inflation forecast  I would like to address the development of inflation. Inflation has declined significantly in recent months, and stood at 2.2% in May. This decrease was above all attributable to lower inflation on imported goods, in particular lower prices for oil products and natural gas. Our new conditional inflation forecast is based on the assumption that the SNB policy rate is 1.75% over the entire forecast horizon (cf. chart 1). Through to the end of 2023, the new forecast is below that of March. The lower oil and gas prices and the stronger Swiss franc are having a dampening effect over the short term. From 2024 onwards, the new forecast is higher than in March, despite today’s increase in the SNB policy rate. The reasons for this are ongoing second-round effects, higher electricity prices and rents, and more persistent inflationary pressure from abroad. The new forecast puts average annual inflation at 2.2% for 2023 and 2024, and 2.1% for 2025 (cf. table). In the forecast period, inflation is likely to be increasingly driven by higher prices of domestic goods and services. Without today’s policy rate increase, the inflation forecast would be even higher over the medium term.