Questions and answers on monetary policy strategy

• What goals does the SNB pursue with its monetary policy?

  In accordance with the Federal Constitution and the National Bank Act (NBA), the SNB has the mandate to conduct its monetary policy in such a way that money preserves its value and the Swiss economy can develop in an appropriate manner. The Constitution (art. 99) obliges the SNB, as an independent central bank, to conduct a monetary policy that serves the interests of the country as a whole. In addition, art. 5 NBA specifies that the SNB is to ensure price stability while taking due account of the development of the economy.

• How can the SNB influence price stability?

  The SNB maintains price stability by ensuring appropriate monetary conditions. This means keeping interest rates and the exchange rate aligned to the prevailing economic situation. Low interest rates promote the supply of money and credit to the economy, thereby increasing demand for goods and services, as well as investment. Over time, however, production capacity may become stretched, leading to a rise in the price level. Equally, there is the risk of imbalances on the financial and real estate markets. Conversely, rising interest rates lead to a shortage in the supply of money and credit, thereby holding back aggregate demand. This leads in turn to a fall in capacity utilisation and causes downward pressure on prices. Given Switzerland's strong integration in the global economy, the exchange rate influences both the price level via import prices, and the utilisation of production capacity via exports.

• How does the SNB make its monetary policy decisions?

  As a rule, the SNB conducts a monetary policy assessment every quarter (in the middle of March, June, September and December) and decides on the monetary policy course. If circumstances so require, such decisions can also be made at other times. The SNB informs the public of its monetary policy decisions and the reasoning behind them. For its monetary policy decisions, the SNB analyses and assesses the economic and monetary situation (in particular the inflation outlook) in Switzerland. The monetary policy assessment is also based on the information gathered and evaluated by the SNB during its company talks (Questions and answers on regional economic relations). Special attention is paid to economic developments abroad because they play an important role for a country like Switzerland with its strong international integration. Based on this comprehensive analysis, the SNB draws up an inflation forecast and decides whether its monetary policy is to remain unchanged, or be tightened or eased. As a rule, monetary policy decisions are taken with regard to interest rates. But this is not always the case. If necessary, the SNB can also take non-interest rate related decisions - examples include the introduction of the minimum exchange rate on 6 September 2011 and its discontinuation on 15 January 2015, and the establishment of the SNB COVID-19 refinancing facility (CRF) in March 2020. The SNB implements its decisions through its monetary policy instruments (Questions and answers on monetary policy implementation). The latest monetary policy decisions are available at Monetary policy for the current year.

• What is the SNB's monetary policy strategy?

  The SNB's monetary policy strategy refers to the way in which the SNB aims to fulfil its statutory mandate of ensuring price stability. The strategy, which has been in place since 2000, consists of three elements. The first element specifies what the SNB understands by price stability. The second element refers to the conditional inflation forecast as the main indicator for monetary policy and as a central instrument of communication. The third element describes how the SNB implements its monetary policy by influencing the interest rate level and the exchange rate.

• How does the SNB define price stability?

  The SNB defines price stability as a rise in the Swiss consumer price index (CPI) of less than 2% per annum. This is the first element of the monetary policy strategy. The CPI is calculated by the Swiss Federal Statistical Office (SFSO). Further information is available on the CPI website of the SFSO (www.bfs.admin.ch). Price stability refers to the overall average of price changes. Prices of individual goods and services can easily fluctuate more strongly. Deflation - in other words, a sustained decrease in the overall price level - is also regarded as a breach of price stability.

• Why is price stability so important?

  Price stability is an important prerequisite for growth and prosperity. It means that money retains its value over time and prices can optimally fulfil their informative function for decisions regarding output and consumption. By seeking to keep prices stable, the SNB creates an environment in which businesses can make plans on a reliable basis and fully exploit their production potential.

• What happens if prices are not stable?

  A sustained increase in the price level (inflation) and a sustained decrease in the price level (deflation) both impair economic activity. Inflation and deflation make decision-taking more difficult for manufacturers and consumers. They distort price signals, which can lead to the inefficient use of the production factors labour and capital. In addition, they cause redistributions of income and wealth and, as a rule, put the economically more vulnerable at a disadvantage.

• Why does the SNB not define price stability as a CPI change of 0%?

  With its definition, the SNB takes into account the fact that inflation cannot be measured precisely. Measurement problems arise, for example, when the quality of goods and services improves. Such changes are not fully taken into account in the CPI calculation. As a result, measured inflation tends to slightly overstate actual inflation.

• In its definition of price stability, why does the SNB take into account only consumer prices via the CPI and not, for example, real estate or share prices?

  The CPI is based on a basket of goods that mirrors typical consumer behaviour in Switzerland, and is therefore a comprehensive and widely accepted reflection of developments in goods and service prices in Switzerland. Assets such as real estate investments and shares are not objects of consumption, but serve as a store of value, so they do not flow directly into an analysis of price stability. However, the SNB does take developments in asset markets into account for its monetary policy assessments, since these markets have an indirect influence on price stability and the development of the economy as a whole. And real estate price movements influence the CPI indirectly through rental prices.

• Why does the SNB take headline inflation as a measure and not other inflation indicators such as core inflation, as several other central banks do?

  Core inflation, which excludes certain categories of goods such as energy and food, as well as other inflation indicators can all be useful for assessing inflation trends. For the SNB, however, headline inflation is decisive because it is the relevant measure for the Swiss population.

• What impact does the exchange rate have on price developments?

  An independent monetary policy that is geared towards the objective of price stability fundamentally requires flexible exchange rates. This does not mean, however, that the SNB disregards exchange rate developments. In a small open economy such as Switzerland's, with a currency seen as a safe haven in times of uncertainty, changes in the exchange rate have a significant impact on inflation and the economy. Together with the interest rate level, the exchange rate determines the monetary conditions. If the SNB adjusts interest rates or intervenes in the foreign exchange market, this has an impact on the exchange rate.

• How does the SNB monitor the maintenance of price stability?

  In connection with its quarterly monetary policy assessments, the SNB publishes a conditional inflation forecast covering a three-year period - the second element of its monetary policy strategy. This forecast serves as the main indicator for the upcoming monetary policy decision, when the SNB determines whether to tighten monetary policy, relax it or leave it unchanged. Furthermore, the conditional inflation forecast provides valuable guidance for the general public and is therefore a key element of the SNB's external communication.

• Why does the SNB speak of a 'conditional' inflation forecast?

  The SNB's inflation forecast is based on the assumption that the SNB policy rate communicated at the time of publication will remain unchanged over the next three years. This conditional forecast shows how the SNB expects consumer prices to move in the event that the SNB policy rate does not change. For this reason, the SNB's conditional inflation forecast cannot be compared with forecasts by banks or research institutions, which, as a rule, factor anticipated policy rate development - i.e. the SNB's reaction to economic and price movements - into their forecast calculations.

• Why does the SNB produce an inflation forecast for a period of three years?

  A time span of that length is certainly fraught with great uncertainty, but three years is approximately the period required for monetary policy measures to take full effect on output and prices. With its three-year inflation forecast, the SNB thus takes account of the fact that the effects of monetary policy are lagged, and it therefore has to adopt a forward-looking stance in its monetary policy decisions and react at an early stage to threats of inflation or deflation.

• When does the SNB adjust its monetary policy?

  If the inflation forecast shows values that lie outside the price stability range, an adjustment to monetary policy may be necessary. Should inflation threaten to exceed 2% on a sustained basis, the SNB would consider tightening its monetary policy. Conversely, it would envisage relaxing its policy if deflationary trends were identified.

• Does the SNB automatically adjust its monetary policy when the inflation forecast is outside the price stability range?

  The SNB does not react mechanically to the inflation forecast. In its monetary policy decisions, it considers the general economic situation as well as risks that are not factored into the forecast models. If inflation temporarily exceeds 2% as a result of exceptional factors, such as a sudden surge in oil prices or strong exchange rate fluctuations, monetary policy does not necessarily need to be adjusted. The same applies to short-lived negative inflation.

• What indicators does the SNB base its inflation forecast on?

  The SNB draws up its inflation forecast on the basis of various forecast models and numerous macroeconomic indicators, which it regularly explains and comments on in its report on the quarterly monetary policy assessment (published in the Quarterly Bulletin). For a country like Switzerland with its strong international integration, developments in the global economy play an important role. The SNB's inflation forecast is therefore based on assumptions concerning future global trends. It uses different scenarios relating to global economic developments, as required, in order to assess specific risks for the forecast.

• Has the SNB managed to maintain price stability in recent years?

  Since the introduction of the SNB's new monetary policy strategy at the end of 1999, inflation has largely remained within the bandwidth that the SNB equates with price stability, except in 2008 (+2.4%), 2009 (-0.5%), 2012 (-0.7%), 2013 (-0.2%), 2015 (-1.1%), 2016 (-0.4%) and 2020 (-0.7%). Although inflation thus temporarily moved outside the defined range, price stability has been maintained. If inflation temporarily exceeds 2% or temporarily sinks below 0%, this may be the result of exceptional factors, such as a large and abrupt change in oil prices or strong exchange rate fluctuations.