Swiss Monetary Policy: Autonomy or Adaptation to Europe?

Georg Rich, Director of the Swiss National Bank

European Institute of the University of Basel, Basel, 03.04.2000

Before the transition to the euro, many people were concerned that the introduction of the new common currency would lead to a turmoil on the foreign exchange markets. In particular, it was widely expected that the Swiss franc would appreciate significantly against the euro and thus inflict pain on our economy. These fears were nourished by the events of 1994/95, when distrust in the future common currency triggered a capital flight into the Swiss franc.

The transition to the euro, however, proceeded smoothly. The expected franc appreciation did not materialise. The exchange rate of the Swiss franc against the euro, by contrast, has been surprisingly stable. How can this stability be explained? Many analysts contend that the Swiss National Bank (SNB) does not really conduct on autonomous monetary policy but shadows the European Central Bank (ECB) by aiming at a stable euro/Swiss franc exchange rate.

Admittedly, the SNB until the spring of 1999 endeavoured to forestall an appreciation of the Swiss franc. However, it was not concerned about a stable franc exchange rate as such. Rather, the SNB undertook, by means of an expansionary monetary policy, to counteract deflationary pressures weighing on the Swiss economy. In the meantime, the deflationary pressures have given way to a strong cyclical recovery. Therefore, the SNB began to tighten the monetary brakes again in the autumn of 1999. Today, it is no longer necessary to prevent an appreciation of the Swiss franc against the euro. In essence, the SNB follows an autonomous monetary policy strategy directed at safeguarding price stability.

For all practical purposes, there is often a significant correspondence between Swiss and European monetary policies. Die SNB and ECB not only follow similar monetary policy objectives and strategies, but they also operate in a similar environment. Even so, the similarities are not large enough to obviate the need for an autonomous monetary policy.

In contrast to pegging the Swiss franc to the euro, the autonomous approach has two advantages: (a) Following an autonomous monetary policy, the SNB is able to take into account the specific needs of the Swiss economy. For example, in the second half of the 1990s, the SNB facing the then prevailing deflationary pressures relaxed monetary policy more strongly than German Bundesbank. Conversely, in the past months, it has tightened its reins more strongly than the ECB. (b) Thanks to the SNB's autonomous monetary policy, Switzerland has been able to maintain, on average, lower long-term interest rates than the euro area. For these reasons, pegging the Swiss franc to the euro is not up for discussion.