Current challenges for the Swiss National Bank in the area of monetary policy

Thomas Jordan, Alternate Member of the Governing Board

Money Market Event, Zurich, 22.03.2007

The Swiss economy is in excellent shape and in 2007 is again expected to grow at a rate higher than its potential. On the assumption that the interest rate remains unchanged, the Swiss National Bank (SNB) forecasts that the interest rate will continue to trend upwards. This suggests that – seen from the current perspective – the normalisation of monetary policy is not yet concluded.

However, at present there is considerable uncertainty with regard to assessment of the necessary course of action. Structural changes in the Swiss economy may have an impact on key equilibria and knowledge of these equilibria is extremely important in gauging the neutral rate of interest. Alongside the usual uncertainties relating to future cyclical developments, the SNB is therefore currently faced with significant challenges in determining the values of key equilibria. In this paper, particular attention is given to three topical aspects. The first is the difficulty in determining the capacity level at which wage pressure starts to become apparent, due to the fact that the labour market in Switzerland has been opened up. The second is that reforms and the opening up of the Swiss economy make it more difficult to estimate the level of potential growth, and it is therefore tricky to determine the level at which the output gap becomes positive, with the onset of overheating. The third aspect is the fact that structural change can also lead to a new real exchange rate trend path for the Swiss franc. This makes it more difficult to assess the threat of inflation arising out of the weakening of the Swiss franc against the euro.

The high degree of uncertainty with regard to structural changes in the Swiss economy demands a higher level of vigilance and flexibility on the part of the SNB. The favourable economic situation and low level of inflation in Switzerland are making it possible for the SNB to move towards a neutral monetary policy.