Comments on Swiss monetary policy

Thomas Jordan, Chairman of the Governing Board

108th Ordinary General Meeting of Shareholders of the Swiss National Bank, Berne, 29.04.2016

The Swiss National Bank's (SNB) monetary policy is aimed at easing pressure on the Swiss franc. Since the discontinuation of the minimum exchange rate in January 2015, it has been based on two key elements: the negative interest rate of -0.75% charged on sight deposits held at the SNB and the willingness to intervene in the foreign exchange market as necessary. In this way, the SNB supports the Swiss economy, which grew by 0.9% in 2015 - a positive development in view of the continued weakness of the global economy.

The inflation rate remains negative, attributable to the appreciation of the Swiss franc and the drop in oil prices. A small open economy like Switzerland is continuously exposed to powerful outside influences, which cannot always be entirely offset by monetary policy. The inflation rate is expected to re-enter positive territory in 2017 and thus return to the range compatible with price stability.

The expansion of the SNB's balance sheet since 2008 inspired the idea to set up a sovereign wealth fund to manage its foreign exchange reserves. This proposal should be rejected for a number of reasons. First, the foreign currency was bought by the SNB bringing more Swiss francs into circulation. Such an expansion of the money supply, however, does not create any real value. The SNB cannot make an unrequited transfer of foreign currency. The sovereign wealth fund would therefore have to buy the foreign currency from the SNB. Second, a sovereign wealth fund would not make monetary policy easier but more difficult, should it become necessary in the future to reduce the money supply. Third, a sovereign wealth fund could only generate higher income by taking greater risks, and yield would fluctuate even more as a result.

The SNB shares the concerns of the Federal Council in relation to the sovereign money initiative. This initiative calls for a radical overhaul of the financial system aimed, in particular, at improving bank stability. It would be an experiment for which there is no comparable model in any other country. Improved bank capitalisation, as advocated by the SNB, contributes considerably more to increasing the stability of the financial system. Furthermore, if the initiative were to be accepted, the SNB would become a political football since it would have to freely distribute new money directly to the state or to private households.