How successful has the SNB's monetary policy approach been in practice?
Thomas Jordan, Alternate Member of the Governing Board
Vereinigung Berner Wirtschaftswissenschafter (VBW), Berne, 27.02.2007
In the second half of the 1990s, the demand for central bank base money became increasingly instable, and at the end of 1999, the Swiss National Bank (SNB) abandoned its strategy for managing the money supply. In its place, it introduced a new monetary policy approach focusing on an inflation forecast. The aim of the new approach was to ensure continuity and to make monetary policy credible and predictable by binding it to a fixed rule, while simultaneously opening up a certain amount of short-term latitude for cushioning shocks. In addition, monetary policy decisions were to be more broadly-based and communications intensified, in order to make monetary policy more transparent.
This new approach has made it possible for the SNB to react decisively to a series of positive and negative shocks over the past seven years, utilising its monetary policy leeway without endangering Switzerland's long-term price stability. Clearly, the new policy approach has demonstrated its viability. Without doubt, if an approach based purely on the money stock had been used during this period, it would have been inferior to the current policy approach. However, the new approach alone is no guarantee for continued monetary policy success. Consequently, the SNB will continue to conduct its monetary policy with the utmost care and vigilance.
At the moment, monetary policy is not yet neutral. Therefore, despite the very low rate of inflation at present, the SNB intends to continue its policy of gradual normalisation. In doing so, it is guided by the long-term inflation trend. In this respect, the SNB is keeping a close eye on the impact of both the continued robustness of economic growth and the tendency to softness in the Swiss franc exchange rate.