Monetary policy challenges currently facing the SNB
Dewet Moser, Alternate Member of the Governing Board
Association of Swiss Pension Funds (ASIP) general meeting, Zurich, 08.05.2015
For the last eight years, the international economic environment has been shaped by crises, imbalances, adjustments and uncertainties. Neither the Swiss economy nor the Swiss National Bank (SNB) can escape these unedifying realities. The SNB's decision of 15 January to discontinue the minimum exchange rate against the euro and to lower the interest rate on sight deposit account balances to -0.75% must be seen against this backdrop. The decision has far-reaching implications for the Swiss economy. For investors, too, the climate has become more challenging. Fixed-income investments, both in Switzerland and abroad, are only earning very low - or, in some cases, even negative - returns. Particularly pension funds, which are obliged to hold a certain proportion of their investments in Swiss francs and to generate a minimum return, are finding it difficult to identify any safe, interest-bearing investments.
Persistently low interest rates are a global phenomenon that is only partially due to the exceptional measures adopted by the central banks. Yet central banks can neither create long-term growth nor solve structural problems. Likewise, they ultimately cannot relieve market participants of economic risks. Any central bank that attempts such moves runs the risk of losing sight of its legal mandate to ensure price stability. Central banks are sometimes required to make difficult decisions which generate costs and may be unpopular. The decision of 15 January, which the SNB took in the interests of Switzerland as a whole, undoubtedly falls into this category.
As negative interest is only being charged on banks' and other financial market participants' sight deposits at the SNB, pension funds are not feeling the strain directly. While precise rates and exemption thresholds vary, banks are nonetheless passing negative interest rates on to large investors. Doing so is desirable from a monetary policy perspective as it is the only way for the mechanism to take full effect. Negative interest is applied across the board for the same reason and as few exceptions as possible are made. Indeed, the SNB recently shortened the list of exceptions further still.
A robust pension system is essential for our country. However, while the low interest rate environment and negative interest rates may be capturing the headlines, in this debate we should remember that many of the challenges confronting pension funds are regulatory and demographic in nature. Some of the key factors here include the retirement age, the amount and type of financing, and the benefits promised. The SNB cannot guarantee a minimum interest rate, nor can it absorb the cost of demographic changes. However, by pursuing a monetary policy geared towards price stability, the SNB helps to create the healthy foundations upon which economic growth and prosperity are built.