SWISS INFLATION EVENT CONDITIONAL INFLATION FORECAST

Transcription

1 SWISS INFLATION EVENT Nicolas A. Cuche-Curti, Swiss National Bank and University of St. Gallen Disclaimer The opinions expressed in these notes and during the speech are solely the responsibility of the author and do not necessarily reflect the views of his affiliations. October 3, 2 Swiss Inflation Event November 2 Swiss Bond Commission

2 Road map Introduction CV part I: to present the SNB s monetary policy strategy (instruments goals) and to give an overview how the SNB s conditional inflation forecast is computed (intermediate indicator) part II: to present published SNB s key indicators in order to assess inflationary and deflationary risk current position: Deputy Head of Inflation Forecasting, SNB since 23 work experiences: Studienzentrum Gerzensee, Avenir Suisse, UBS studies: Handelsschule Neuchâtel, HSG, HEC Lausanne, University of California at Berkeley Swiss Inflation Event November 2 Swiss Bond Commission /2

3 Part I Swiss National Bank and its strategy Organizational chart General Meeting of Shareholders Audit Board Bank Council Internal Auditors Governing Board Enlarged Governing Board Department I Zurich International Monetary Cooperation International Monetary Relations International Trade and Capital Flows Technical Assistance Economic Affairs Department II Berne Department III Zurich Legal and Secretariat Property Services General Finance and Risk Financial Stability Cash StabFund Financial Markets Monetary Policy Analysis Legal Services Communications Central Accounting Banking System Inflation Forecasting Human Resources Documentation Controlling Economic Analysis Statistics Pension Fund Premises and Technical Services Research Coordination and Education Secretariat General Berne Risk Management Security Systemically Important Banks Oversight Administration and Cashier s Offices Technical Support and Storage Money Market and Foreign Exchange Asset Management Investment Strategy and Financial Market Analysis Banking Operations Banking Operations Analysis Payment Operations Back Office Master Data Information Technology Banking Applications Business Support Processes Infrastructure Source: SNB (2): Annual report 2 Swiss Inflation Event November 2 Swiss Bond Commission 2/2

4 Part I Swiss National Bank and its strategy Monetary policy strategy after 2 from Sep before 2 main instrument repo transactions currency swaps operational target intermediate target final target III 3M Libor floor.2 EURCHF II cond. infl. for., no target main indicator, communica. I price stability explicit def. (< 2 and pos.) bank reserves giro accounts monetary aggregates various definitions price stability no explicit definition inflation targeting monetary targeting Swiss Inflation Event November 2 Swiss Bond Commission 3/2

5 Part I Swiss National Bank and its strategy Element II Conditional inflation forecast as main indicator Chart. Conditional inflation forecast of June 2 and of September 2 Percentage change in national consumer price index from previous year Inflation Forecast June 2 (with Libor at.25) Forecast September 2 (with Libor at.) Source: SNB Swiss Inflation Event November 2 Swiss Bond Commission 4/2

6 Part I Swiss National Bank and its strategy Element II Conditional inflation forecast as main indicator construction: different quantitative models conditional forecast: assuming a constant interest rate (so the name conditional ); however the interest rate cannot be expected to remain unchanged over the following 2 quarters assuming the most likely international scenario (i.e. business cycles, monetary policies, inflation rates, etc.); small open economy approach interpretation: in general, the stance of monetary policy is changed when there is a long-lasting deviation of the inflation forecast from the definition of price stability interpretation: no systematic or mechanical monetary policy reaction to the inflation forecast dynamics of the forecast: gives some hints about likely future interest rates; if the forecast at the end of the forecast period is near or above 2 (or below ), the likelihood of increasing (decreasing) interest rate is high Swiss Inflation Event November 2 Swiss Bond Commission 5/2

7 Part I Swiss National Bank and its strategy Element III Target band for the 3M Libor in Swiss francs Chart 5. Money market rates Daily figures 3M Libor SNB repo rate SNB reverse repo rate Target range 3M OIS Sources: Bloomberg, Reuters, SNB Chart 5.2 Spread between 3M Libor and 3M OIS Daily figures role: the 3M Libor is a significant short-term, interbank interest rate for Switzerland steering: the SNB influences the Libor through ON to 3-week repos repos: contract in which the seller of securities agrees to buy them back at a specified time and price and to pay interest (repo rate) bank width: the target range is usually one-percentage point wide to ensure a certain flexibility targeted position within the bank: is usually announced Spread Sources: Bloomberg, Reuters temporary fluctuations: outside the range can be tolerated in special circumstances Swiss Inflation Event November 2 Swiss Bond Commission 6/2

8 _d :7 Uhr Seite 2 CPI inflation Part II Inflation and deflation assessment he inflation rates have remained uarters. Whereas d a slightly posi - those for foreign ck level. With the anc, this discrep - ced, but it had previous quarters ic goods are on a negative year-onontrast, are tend - anged little over 2). I, the SFSO s core ed mean (TM5) DFI) can be used. the SNB. In the tly price-volatile PI every month, prices with the lation rates are re inflation rates modities basket. t, calculates core timated dynamic real and nominal e data. Chart 4.3 nded downwards viously recording inflation data basis of the I series was pub - onthly Statistical eries, the revised n as measured by Chart 4. CPI: domestic and imported goods and services Year-on-year change Total Domestic Imported Imported excluding oil Sources: SFSO, SNB Chart 4.2 CPI: domestic goods and services Year-on-year change Goods Priv. services excl. rents Rents Pub. services Sources: SFSO, SNB headline inflation: quarterly data, consumer prices, year-on-year percentage change oil price inflation: with a weight of app. 7, energy prices can markedly influence the inflation dynamics strong Swiss franc: with imported goods having a weight of app. 27, a strong currency reduces inflationary pressures (ceteris paribus, cheaper imported goods) strong Swiss franc: ceteris paribus, a strong currency weighs on the export activity, which in turn reduces inflationary pressures strong Swiss franc: goods vs. services inflation dynamics Chart 4.3 Core inflation rates Swiss Inflation Event Year-on-year November change 2 Swiss Bond Commission 7/2 CPI TM5 DFI SFSO

9 Sources: CoreSFSO, inflation SNB Part II Inflation and deflation assessment l Chart 4.3 Core inflation rates Year-on-year change CPI TM5 DFI SFSO Sources: SFSO, SNB construction: exclusion principle vs. factor model definitions: SNB vs. FSO role of core inflation: headline inflation is in the monetary policy strategy (CPI inflation is relevant to households), but core inflation help assess inflationary trends Swiss Inflation Event November 2 Swiss Bond Commission 8/2

10 Producer and import prices Part II Inflation and deflation assessment Chart 4.4 Producer and import prices Year-on-year change Total Producer prices Import prices Source: SFSO Chart 4.5 Transaction prices, single-family homes role: beginning of the production chain interpretation: incomplete passthrough between IPI/PPI and CPI construction: census quality Nominal, hedonic Wüest & Partner Fahrländer Partner IAZI Index Sources: Fahrländer Partner, IAZI, Wüest & Partner Swiss Inflation Event November 2 Swiss Bond Commission 9/2

11 Inflation expectations Part II Inflation and deflation assessment Chart 4.7 Survey on expected movements in prices 2-month price development expectations Decrease Unchanged Modest increase Strong increase Sources: SECO, SNB mechanism: inflation expectations may influence actual inflation, self-fulfilling process measurement: financial assets vs. surveys survey: main survey in Switzerland is the SECO s consumer confidence survey with two questions about past and future price developments Swiss Inflation Event November 2 Swiss Bond Commission /2

12 Term structure Part II Inflation and deflation assessment Chart 5.3 Term structure of Swiss Confederation bonds After Nelson-Siegel-Svensson. Years to maturity (hor. axis) Mid-September Mid-June Mid-March Source: SNB Chart 5.4 Estimated real interest rate interpretation: inflation expectations influence the long end of the curve current juncture: flight to quality effects dominate 3 years, ex ante Source: SNB Swiss Inflation Event November 2 Swiss Bond Commission /2

13 N_d :7 Uhr Seite 29 Monetary aggregates aggregates e omposed of bankestic banks sight very substantially sed liquidity on he monetary base autumn 28 in reaction to the crisis and had then, with some. ly based tes provide a bet - e into the impact y and prices. They autumn 28 (cf. sh in circulation, counts) was 9.7 hile M2 (M plus r and M3 (M2 plus the same period se in M3 is being nding. picked up slightly SNB s quarterly he banks slightly d conditions for ouseholds in the count for around creased by a yearcond quarter and first quarter. The considerably in Chart 5. Monetary aggregates Source: SNB Seasonally adjusted Part II Inflation and deflation assessment M M2 M3 Monetary base (rhs) In CHF billions In CHF billions 95 5 Chart 5. Growth of monetary aggregates Year-on-year change M M2 M3 Source: SNB Chart 5.2 Mortgage claims and 3M Libor Mortgage claims (year-on-year change) M Libor quantitative theory of money: inflation is a monetary phenomenon current juncture: precautionary demand Swiss Inflation Event November 2 Swiss Bond Commission 2/2