Small country - big challenges: Switzerland's monetary policy response to the coronavirus pandemic

Thomas Jordan, Chairman of the Governing Board

2020 IMF Michel Camdessus Central Banking Lecture, Washington and Zurich, 14.07.2020

In Switzerland and many other countries, the coronavirus pandemic has led to a strong economic downturn. The task of monetary policy in such a situation is firstly to ensure appropriate monetary conditions. In our country, the negative interest rate and foreign exchange market interventions play a decisive role in this respect. Secondly, monetary policy must provide banks with the liquidity they need to supply the economy with credit. In Switzerland, the government set up a programme through which it provides guarantees for corporate loans. The Swiss National Bank provides the liquidity for this loan programme.

Even before the coronavirus pandemic reached Switzerland, the monetary policy situation in this country was not easy. As a small open economy, Switzerland is highly exposed to disruptions from abroad. Recent years have seen a number of crises exert upward pressure on the Swiss franc as a safe-haven currency. This has been compounded by the effects of the global low interest rate environment. Historically, interest rates in Switzerland have generally been substantially lower than those abroad, which means that the SNB has less scope for interest rate cuts in positive territory than other central banks. The global decline in interest rates therefore narrowed the interest rate differential with other countries, which led to upward pressure on the franc.

The SNB introduced the negative interest rate to at least partially restore the usual interest rate differential with other countries and thus alleviate the upward pressure on the Swiss franc. The decision to impose negative interest requires, like all monetary policy decisions, a cost-benefit analysis. In Switzerland, given the high importance of the exchange rate, the benefits clearly outweigh the costs in the current situation. To ensure that monetary policy is sufficiently expansionary, the SNB combines negative interest with interventions in the foreign exchange market. Here, again, a continuous cost-benefit analysis is key. Interventions prevent an excessive appreciation of the franc, but also expand the SNB's balance sheet and thus increase the financial risks. However, they are currently indispensable, together with negative interest, in order to ensure appropriate monetary conditions in our country.

During the coronavirus pandemic too, there has been increased upward pressure on the Swiss franc, triggered by expansionary monetary policy abroad and capital flows into the franc as a safe haven. Due to the strong franc, inflation has fallen significantly into negative territory in recent months. Amid the coronavirus crisis, the negative interest rate and foreign exchange market interventions are therefore more necessary than ever in order to ensure price stability over the medium term.