Monetary policy in difficult times

Jean-Pierre Roth, Chairman of the Governing Board

Business Club Geneva, Geneva, 11.02.2003

2002 proved to be a disappointing year for the economy. The correction of previous imbalances (stock market bubble, accounting irregularities, overinvestment) has apparently had a stronger and longer lasting effect than anticipated. Global economic growth is weak, especially in the area of investments.

Owing to its specialisation in the production of capital goods and the importance of its financial sector, Switzerland is more affected by the unfavourable development than other countries. The strong franc also hampers growth. The economic recovery will be slow and remains burdened with two significant risks: firstly, the difficulties encountered by our trading partners, particularly Germany, could weigh on our export industry for a longer period than anticipated. Secondly, the geopolitical uncertainties present a danger for the franc. Should the markets behave unreasonably, the Swiss National Bank will do all in its power to make sure that Switzerland will not be excluded from an economic recovery and that inflation will not slide into the dangerous territory of negative growth rates.

A monetary policy that strives to influence real exchange rates with cyclical needs in mind or to link the franc to the euro would have more disadvantages than advantages in the current environment. Hoping to control the development of real exchange rates is wishful thinking, which will lead to a loss of control over domestic liquidity and ultimately prices. Pegging the Swiss franc to the euro would inevitably lead to higher interest rates in Switzerland. This would have negative consequences for both the economic situation and the real estate market without doing anything to secure the competitiveness of our export industry. The Swiss franc has not been destabilised vis-à-vis the euro by the global political uncertainties and the recent correction of the US dollar. This ought to inspire confidence. The role of the Swiss franc as a traditional safe haven currency is apparently not quite as pronounced as is often implied.