Monetary policy in 2015 - a first assessment

Andréa M. Maechler, Member of the Governing Board

Money Market Event, Geneva, 19.11.2015

Since the discontinuation of the minimum exchange rate on 15 January 2015, the monetary policy of the Swiss National Bank (SNB) has been based on two complementary and mutually reinforcing pillars: the negative interest rate and the willingness of the SNB to intervene on the foreign exchange market. The negative interest rate, which applies to sight deposits held by banks and other financial market participants at the SNB, is not a conventional monetary policy instrument. It is a consequence of the fragile international environment and its exceptionally low interest rates. This measure has enabled the SNB to restore the traditional interest rate differential with other countries. The willingness to intervene in the foreign exchange market takes effect when there is a sudden increase in risk aversion among Swiss and foreign investors as a result of high uncertainty and volatile markets, leading to a rise in demand for Swiss francs. This was the case, for example, with the events that unfolded this summer in Greece. Both the willingness to intervene and the negative interest rate help to counter the upward pressure on the Swiss franc. At current values, the Swiss franc remains significantly overvalued.

With regard to money and capital markets, experience to date shows that the negative interest rate has worked remarkably well as a monetary policy instrument. While the negative interest rate caused interest rates on the money and capital markets to decline, mortgage interest rates did not decrease to the same extent. Indeed, for long-term mortgages, rates are even slightly higher than they were at the beginning of the year. Hence, fears that the negative interest rate might increase imbalances on the mortgage market have so far been unfounded.

The Swiss economy has proved to be surprisingly resilient, given the difficult conditions since the global economic crisis. Two factors are key here: monetary policy and competitiveness. However, measures to maintain competitiveness require painful adjustments by companies and their employees. This includes in particular the willingness of many companies to accept lower profit margins.

The SNB expects the global economy overall to grow moderately in the coming years. This should help to partially offset the drag from the overvalued Swiss franc. The SNB is forecasting that, this year, average inflation in Switzerland will reach its trough in the fourth quarter. Since the two main factors - the sharp appreciation of the Swiss franc and the fall in oil prices - are transitory, they do not pose a threat for price stability in Switzerland over the medium term. Sustained negative inflation or, indeed, a deflationary spiral are therefore not to be expected.