Swiss monetary policy in the midst of the euro area: An illusive independence?

Georg Rich, Director of the Swiss National Bank

Centre d’études bancaires und Association Bancaire Tessinoise, Vezia, 19.05.1999

The SNB serves most effectively the general interests of Switzerland by conducting an independent monetary policy. If the SNB pursues an independent course, it is able to take into account the specific needs of the Swiss people and the Swiss economy. However, the SNB cannot follow an effective independent monetary policy unless it allows the exchange rate of the Swiss franc to float. In these circumstances, the Swiss franc may appreciate excessively and inflict harm on the Swiss economy. In the lecture it is demonstrated that the SNB is not powerless in the face of such developments. The SNB is always able to aim its monetary policy at stabilising the exchange rate. But it must see to it that it does not relax its course unduly. Otherwise, it runs the risk of fuelling inflation.

If the Swiss franc were linked to the euro, the prospects of harmful exchange rate movements would shrink significantly. The greater stability of the exchange rate would be achieved at the expense of a loss of monetary independence however. Swiss monetary policy would no longer be determined by the SNB, but by the European Central Bank. Swiss interest rates would rise to the levels in the euro area. The attractiveness of the Swiss franc to international investors cease to depend on the credibility and reputation of the SNB. Instead, only the quality of the monetary policy conducted in Frankfurt would henceforth matter.