After the minimum exchange rate: new monetary policy challenges

Fritz Zurbrügg, Member of the Governing Board

Money Market Event, Zurich, 26.03.2015

From 6 September 2011 to 15 January 2015, the minimum exchange rate of CHF 1.20 per euro was the key monetary policy instrument of the Swiss National Bank (SNB). During that period, it served Switzerland's economy well, partially correcting the massive overvaluation of the Swiss franc. Last year, monetary policy in the major currency areas increasingly began to diverge. The minimum exchange rate was thus no longer sustainable. In mid-January, the SNB therefore decided that the rate would be discontinued. At the same time, it adjusted the negative interest rate on banks' and other financial market participants' sight deposits at the SNB to -0.75%. Negative interest is intended to counteract a tightening of monetary conditions, by making it less attractive to hold Swiss francs compared to other currencies.

The introduction of negative interest is already having the desired effect: Interest rates across the entire term spectrum have fallen, and the spread between Confederation bonds and similarly rated foreign-issued bonds has widened. However, the Swiss franc is still overvalued. It is important that the negative interest rate be allowed to take effect and help to bring about a weakening of the Swiss franc. Efforts to circumvent negative interest rates by obtaining exemptions or shifting to cash are not in the interests of Switzerland as a whole in the current climate.

The discontinuation of the minimum exchange rate will mean that Switzerland has some difficult times ahead. This year, the stronger Swiss franc will have a noticeable dampening effect on economic activity in Switzerland, and CPI inflation will decline well into negative territory. However, this will not jeopardise price stability in the medium term. The period of negative inflation is temporary. This is confirmed by the SNB's inflation forecast and by medium-term inflation expectations, which are still in positive territory. In particular, a damaging deflationary spiral is not expected.

In the future, too, Switzerland will face very considerable monetary policy challenges. The negative interest rate - and the option of intervening on the foreign exchange market as necessary - give the SNB the appropriate tools to fulfil its mandate of ensuring price stability in the medium term while taking account of economic developments.